How do you expect this year to pan out? Which space is your top pick for 2022?
I hope 2022 will be a year of normalisation where the cyclical recovery that we saw just before Omicron wave would continue to hold with lesser supply side disruption or pandemic-driven disruption. I think inflation would moderate going forward. I expect growth momentum in general to sustain led by urban consumption and capex. Areas like roads, urban infra and renewables, and then you have private sector capex in areas like China plus one and PLI beneficiaries like electronics, chemicals, pharma, metals and some new sectors – these sectors initially lead the capex recovery and last but not the least the housing recovery. All of us are very excited about it. Housing market is in a good shape so even from the household side capex which is in the form of house registration and housing activity that would also hold up. So out of the three pillars that we all know, consumption, exports and capex, we are most positive on capex going into FY23.
How would you play capex? Is it capital goods, road infra, cement or parts of realty or mix of all?
I think capital goods, infra, real estate stocks and banking. These are the four ways you can play. In most of these sectors, I think what we can foresee is a very strong earnings tailwind and if that comes you will probably see all of these sectors outperforming. Obviously, one has to be selective here but we are pretty much confident about these domestic investment recovery related sectors to show very good earnings.
What is the shape of economic recovery and what are the indicators which you are reading to ascertain that?
Consumption is a bit tricky. It is a multi-pace kind of recovery. It is the K-shaped recovery. I am sure you have heard of it wherein you have a formal sector which is more urban, upper income consumers they are in possibly the best possible shape and that was getting reflected just before Omicron wave. These reflect in data points like SUV demand, retail sales, credit card spends. Even housing activity this is a sign that well off consumers, the urban rich consumers have very good purchasing power and confidence is also high, but you have a bigger lot of consumers mainly linked to the informal sector, agricultural economy, rural India, their purchasing power has been impacted by COVID and even the previous shocks before COVID. So what you are witnessing is a pronounced weakness in that segment the purchasing power there and the data points that we track like two-wheeler sales or the commentary of FMCG companies for example we know this segment is lagging behind so on overall basis consumption would chug along, but there is huge disparity within different consumption segment and as investors we need to be mindful of what consumption are we talking about.
We will definitely get impacted by global factors like taper, shrinking of the taper and rate hikes on one hand and on the other hand the global economy is also chugging back. Export demand is looking upwards and global capex seems to be taking shape. So how are you putting that piece also into perspective?
The global liquidity and demand environment has helped us a lot – be it earnings on the IT side or metals side or be it on the valuation side. Our valuations have gone up very much in line with the global valuations. That is one headwind where if liquidity withdrawal is there or rate hikes are there. But at the same time, we have gone into this year with large pessimism as far as global earnings are concerned. So I was tracking data for the US or for Europe adjusting for buybacks that they generally do. We are talking about low single-digit kind of earnings growth. So I think while definitely some bit of valuation de-rating is possible, but there is a possibility of surprise which I would personally look for in earnings per se, global earnings or local earnings. So that is the kind of tussle we are dealing with, valuation on one side ensures that probably the return expectation should be moderate, but at the same time earnings attractiveness or the possibility of earnings surprise, the low hurdle rate in terms of earnings expectation makes us constructive on market irrespective of higher valuations. So that is the kind of environment we are dealing with – a bit confusing I must say.
One of the big events in the near term medium term would be the Union Budget. What would your key monitorables be in the budget?
The importance of budget overtime has come down. So it is an important event but in the overall scheme of things, reform is a continuous process. So that is the first thing that we need to keep in mind. Second thing is that in this budget, the government is going with a lot of unspent resources. They could not spend for a variety of reasons. There is no dearth of resources going into this budget. So what I expect is that government spending would actually pick up. The government would show good numbers. Areas where they would probably focus on is where they talked about even last year where the execution was lacking but intent is there which is infra capex and I think what is needed is to provide support the K-shaped recovery I mentioned to provide support to this low income rural informal segment which has been impacted by COVID or other shocks. I am sure that something would be coming there either in the form of income support or the low-cost housing both for rural or urban population but some kind of targeted announcement which helps improve the purchasing power of that low income/rural segment, I think that is what is needed.
One contra word? As in, for the year, which sector can actually surprise the street? Where should people look for value or good bets or earnings-backed stories?
When I look at Nifty earnings, people are positive on a lot of the cyclical sector. I think there has been a lot of pessimism that is getting built in commodities. In fact for FY23, FY24, this is one area where consensus expect you know the material sector to drag earnings not to contribute rather drag earnings. There is degrowth that people are expecting there which I think could surprise if the demand environment recovers post Omicron and liquidity still remains supportive. So if there is one contra trade which one can look for is commodities, energy, metals and chemicals. These can surprise in terms of earnings and therefore stock price performance.