Roadmap for 2023: What equity, debt investors can expect from the new year

Every December, the world gets dressed in its wintery best and gazes towards the promise of new beginnings. In the words of journalist and author William E. Vaughan, “An optimist stays up until midnight to see the New Year in. A pessimist stays up to make sure the old year leaves.” For investors and traders, each new year brings with it the opportunity to analyse the mistakes of the past 12 months and the possibility of happy tidings in the coming 365 days. Before we look at the untapped potential inherent in 2023, let us back at the year that was, and the lessons we learnt along the way.

2022 in Hindsight

The year that is almost at its fag-end, 2022, has been an interesting yet volatile journey, to say the least. From sticky inflation which caused us all to tighten our purse strings upon seeing the exorbitant prices on everything from onions to pulses, to the ongoing geopolitical tension which triggered a surge in crude oil, and therefore, petroleum prices, as well as the deluge of rate hikes by the Reserve Bank of India and other central banks, 2022 has been nothing short of a roller-coaster ride and it is no wonder that most of us are hoping for a less volatile new year.

Despite a variety of downers assaulting the market, 2022 is also the year when the total number of demat or retail broking accounts in India touched the elusive 10.5 crore number, indicating the sustained appetite for equity investments. However, though retail investors remained keen on equities, the IPO market saw a downturn in 2022, with the number of new listings dropping to 31, from 65 a year ago. Given the strong negative cues in the market, newly-listed companies could only mop up INR 58,346 crore in 2022 as against INR 1.31 lakh crores in 2021. With interest rates trending higher, fixed Income investments have also started to look attractive. High quality AAA rated papers, which are also held by many debt mutual funds, are trading at yields of around 7.25- 7.75%.

All in all, 2022 was a year which worked towards siphoning off the excess liquidity prompted by COVID, as businesses and individuals began to return to a state of normalcy post pandemic. People went through their lives with cautious optimism, taking each day as it came, after spending two years largely relegated to their homes. Now that 2022 is at its definitive conclusion, what can we look forward to in the new year?

Outlook for 2023 – GDP and the Stock Market

In terms of GDP growth, ratings agencies and reports indicate that India is poised to remain fleet-footed, with Fitch Ratings stating that the country “could be one of the fastest-growing emerging markets this year” and pegging India’s growth at 7%. However, while India does boast significant structural strengths, there is ongoing concern around the high valuation premium of the market as well as the weakening balance of payments, and this is preventing global firms from going overweight on the country.

Coming to the stock market, we expect another volatile year as the market tracks the US Fed closely. Investors should take advantage of any correction to deploy their cash earmarked for equity. We are positive on the BFSI sector due to strong revival in credit demand, higher interest rates and lower provisioning costs. We see FMCG companies with rural focus to do well next year. We like the Pharma and Hospital sector due to decent valuations and their long-term growth story. Further, with the sustained increase in retail broking and investor awareness, a bevy of individual investors are pumping money into the market, with a long-term horizon, and this is expected to continue in 2023. Investments with a duration of at least two to three years are likely to be rewarded handsomely as this would provide enough time for the underlying macro-economic factors to play out effectively, while also diluting the impact of geopolitical risks and volatility. Companies with strong fundamentals are expected to remain primed for growth as we enter the new year.

Debt Outlook & the Interest Rate Scenario

Turning towards the interest rate scenario, the US Federal Reserve has hiked its rate incrementally to 4.25% – 4.5%, which is the highest it has been in 15 years. With inflation now cooling slowly, the Fed is expected to undertake smaller hikes in 2023, and this will set the pace for India’s rate hikes too. However, with the repo rate in India already at 6.25%, and reports expecting it to rise to 6.75% in 2023, the new year is a superlative opportunity for investors to turn their eye towards the fixed income market. Credit worthiness of India Inc has seen significant improvement in the last one-two years due to strong domestic demand and deleveraging of balance sheets. Thus this is also a good time for investors eager to earn high returns, to look at curated structured credit solutions which can offer 200-300 bps higher return than traditional fixed income options.

Additionally, HNI investors should also consider increasing allocations to the private market as a multitude of good businesses accelerate their expansion and growth plans and seek private capital to fuel this growth. As always, take investment decisions through the lens of your asset allocation strategy, adhering to the established risk and return metrics.

Every year brings with it new opportunities and the same can be said of the coming one. However, it is up to you, the investor, to read the cues carefully and make decisions which have higher chances of providing better risk-adjusted returns in the long run.

(The author is Executive Director, 360 ONE Wealth)