ETMarkets Smart Talk: It is a matter of time when FII allocation to India increases at the cost of China, says Vinay Jaising

In an interview with ETMarkets, Jaising who has over 26 years of experience in the Indian equity markets, said: “Stocks we are buying in the Make in India story include a) Gujarat Fluro chemicals, b) Sumitomo Chemicals amongst others In Private banks, we are buying

and amongst others” Edited excerpts:

The last month of 2022 started off on a positive note with benchmark indices hitting fresh record highs. What is your take on the market for the year 2023?

Historically, November-December are known to be a seasonally strong month of the year wherein markets, especially mid-small cap stocks perform well.

Globally, the technical position of the markets post the Q3-22 weakness, was supportive of a bear market rally going in to Q4-22 driven by earnings commentary and economic data which though weakening, are yet not in recession territory.

Expectedly, global markets have bounced back in November and should largely remain well-bid going into the new year.

After many months, Indian markets have underperformed Global and EM markets in Nov-22. India though up 2-3%, underperformed the MSCI World and MSCI EM which were up 8% and 15% respectively.

Encouraging inflation readings with falling Oil prices have increased the expectations that the US FED will slow down the pace of rate hikes from 75 bps to 50 bps from Dec-22.

The Dollar (DXY) and the US 10-Year Yields have accordingly reduced by 8% and 75bps to 3.5% from the recent highs thereby lending support to Global Equities.

The Indian markets underperformed this month since the risk-on trade favoured those markets which had underperformed, which included China which was up 20% in a month

First half of 2023 may likely be a difficult terrain to navigate for Global Equities as restrictive central banking stance and slowing economic growth starts to weigh on earnings and the downgrade cycle continues.

India will likely outperform in such a period as its economic growth and earnings cycle is relatively more resilient.

However, in the second half, if Global Central Banks shift their focus on supporting growth v/s fighting inflation and as China exits its Zero-Covid policy, beaten-down markets will outperform India.

Indian market at record highs while the world is playing catching up. How do you see FIIs approaching Indian markets in 2023?

The FII ownership in India at around 22% of our shareholding of listed stocks starts at 13-14% in MSCI EM and has not changed substantially in the past.

In our eyes, it is a matter of time FII allocation to India increases at the cost of CHINA which is a high 30%, in the longer term and medium term.

What is your take on the September quarter GDP data?

The Indian economy expanded 6.3% year-on-year in the third quarter of 2022, slightly higher than consensus estimates.

Q2FY23 GDP was supported by robust growth in services amid full-scale opening-up, even as manufacturing sector growth remained muted amid margin pressures.

GVA grew by 5.6% YoY vs 12.7% in Q1FY23. The manufacturing sector shrank by 4.3% YoY, agriculture sector grew by 4.6% YoY. trade hotels transport etc. sector posted a robust growth of 14.7% YoY compared to 9.6% in Q2FY22 signalling revival in the contact-based services sector.

On a 3-Year CAGR basis, real GDP grew by 2.5% in Sep-21 qtr compared to Sep-19 (pre-covid) with private consumption growing by 3.6% and sectoral growth staying resilient with agriculture growing by 3.6%, industry 2.2% and services 2.4% on a 3y CAGR basis compared to Sep-19.

Net exports continued to decline as the global slowdown starts to impact.

The Good news was the GDP deflator which fell to 9.3% in the Sep-22 qtr – the first time below 10% since Dec-21 qtr signalling signs of easing in price pressures. Thus showcasing more promising 2HF2023

The Key out here is India’s GDP growth and PMI numbers look very attractive when we compare it to other global markets which are still in the contractionary zone.

What will drive Indian markets in the year 2023? Will earnings be the focal point or what us Fed does in terms of interest rates?
The trajectory of the Fed rate hikes with tentative terminal rates is largely known. What is not yet clear is how long does this Fed hold the rates.

More importantly, what gets missed in the entire Pivot debate in the markets is the Quantitative Tightening (QT) program. For asset markets, what is most relevant in the near term is the liquidity in the financial markets.

Strong Dollar and ongoing QT will be key drag on the Asset Markets in an environment of a slowing economy and earnings downturn.

FY24 earnings growth in India too will be challenged as FY23 base will be higher for the sectors which are driving earnings.

However, so long as Indian earnings growth continues to outperform Global growth, the Valuation Premium will be justified.

Q2-FY23 Earnings Growth was rather disappointing with NIFTY 500 cos report almost flat PAT growth, but if one were to exclude Financials, the earnings declined over 20% YoY and margins fell over 500bps.

Top 3-5 factors according to you which could puncture the bull run on D-St?

Here are few pointers –

a) Deep Global Recession:

A prolonged restrictive stance by the FED will delay the pivoting, as expected by the markets, and heightens the risk of a deep recession. This will lead to sharper corrections in Global Equities.

b) Sharper Earnings Downcycle:

Indian demand environment has largely been resilient, as can be seen from the loan book growth of 17% YoY, credit card demand of over 25% YoY. If FY24 earnings growth comes

c) INR Pain:

India’s dependence on global energy sourcing to the extent of ~85% of its requirement leads to wide trade deficits when Oil prices sharply move higher and thus leads to drawdowns in Forex reserves. Reserves are robust at US$560 bn but around ~US$100 bn below their peak.

The Dollar is strengthening versus most of the other currencies, also aided by US being self-sufficient in natural resources. MSCI India Dollar Index has underperformed MSCI India in Rupee terms by 9-10% the same reason.

Where do you see smart money moving (over-owned to under-owned sectors)?
Flows are moving to Make in India based themes like Defence, Specialty Chemicals, Contract Manufacturers and under-owned Financials like Small Private Banks, Private Banks and Old Private Banks.

Do you see pressure on the rupee to continue in 2023 as well?

It is important to note that INR has not been under pressure against other major currencies even in 2022. INR has appreciated against most currencies except USD, due to the Fed policies.

INR is most vulnerable against high oil prices since trade deficit starts to drag on forex reserves and portfolio flows also become tentative and reverse as Oil prices head upwards of $100/bbl.

So long as Oil prices remain below $100, INR should be in a comfortable range in 2023. Average INR depreciation historically has been in the range of 4-5% except the 2003-2007 period.

Do you have any Sensex or Nifty targets for the year 2023?

We expect the Indian earnings to cagr at 15-16% F2022-F2024 and with the markets largely flat we have seen a time correction in the last 12 months

We expect the NIFTY 50 EPS to increase from Rs 733/share in F22 to Rs 1100 in F25, propelled by growth from the banking sector and resurgence of the auto sector

If we were to assume a PE of 20x a year from now we would be looking at a one year forward EPS of 1060, and hence an Index of 21215 cannot be ruled out

On the bottom side if we were to use the 10 year P/e multiple of around 16x, 17x Index could be the bottom.


Any top picks that investors can look at buying for the year 2023

We are bullish on the MAKE In India story and private banks. Stocks we are buying in the Make in India story include a)

, b) Sumitomo Chemicals amongst others In Private banks we are buying Kotak Mahindra and HDFC amongst others

Do you see India-focused sectors doing well in the next year amid expectations of populist measures from Budget 2023?

I think the importance of the budget is soon fading and the Indian government has taken most of the major actions of budget – These include GST and lowering of Taxation

Having said than Capex spend, Divestment and Rural India thrust should be the three focus areas fro the government

How do you see the fall of Crypto in 2022? Do you see the craze going down in 2023, and the blocked money could well flow back into equities?

When Interest rates move up, cost of funds increase, and P/E reduces. NASDAQ hence fell 20% last year as against S&P which fell half of that

The underlying asset and its potential profitability become very important for any investor to see and the cliche “CASH IS KING” is coming back.

This should lead to cash inflows in Equity markets increasing especially in quality stock

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)