Investors must have moderate return expectations in 2023: Nippon India exec

Earnings could be challenging as global economic growth is weakening, says Sailesh Raj Bhan

Indian markets were "remarkably resilient" in 2022 to reach record levels, said Sailesh Raj Bhan, deputy chief investment officer--equity investments, Nippon India Mutual Fund. Investors would be wise to have moderate return expectations in 2023 as global uncertainties remain, he told Sundar Sethuraman in an interview.

Here are edited excerpts from an interview.

How do you sum up the year gone by? What unique things have you experienced as a money manager?

The resilience of Indian markets has been quite remarkable, as the markets scaled record-high levels amidst heightened global volatility. The global risk-off phase led to sharp outflows from global and emerging market equities. Indian markets also weathered one of the sharpest phases of selling by foreign investors, and yet after some weakness during mid-2022 have sharply rebounded to scale fresh highs. The financialization of household savings into equities directly or through a vehicle like Mutual Funds, PMS has been unprecedented lending strong support during the global risk-off period.

What are the expectations for next year? How are we placed in terms of valuations, earnings growth?

As we enter 2023, we see an environment where both inflation and growth might be slowing. India most likely will again emerge as the fastest-growing economy with perhaps limited macro volatility. Yet, near-term global uncertainties are unlikely to wither away soon and therefore it would be wise to have moderate return expectations in the near term. Earnings can remain challenging for some time as global growth is weakening and local economic conditions after a strong recovery post-covid can come back to normal trends.

The year 2022 saw a moderation in equity flows and investor growth. Will the moderation continue?

Domestic investors have witnessed stellar equity returns over the last couple of years, and hence it's quite understandable that investors would have made some reallocation and may have altered their mode of participation. For instance, over the last 11 months, it is estimated that SIP inflows increased by over 30% with over 6 crore live SIP accounts. Given the worries over slowing growth, rising interest rates and the likely volatility, it's quite logical to infer that the systematic route could be the preferred way of investing.

Which are the pockets/themes that look attractive at this juncture?

In our view, there are many interesting themes which can potentially benefit from the domestic growth possibilities. Some of the key ones include:

Banks: India’s combined debt of corporates and households is very low compared to global debt, providing tremendous scope for leverage-driven domestic growth. With a growing economy and rising credit penetration, bank credit may grow at a faster pace than nominal GDP growth.

Formalization and Urbanization: India’s urbanization is quite low by global standards and is witnessing tremendous acceleration, this represents various opportunities including housing, premiumization across consumer categories like retail, leisure, etc

Manufacturing: There have been various tax incentives both in the form of direct taxes (Corporate taxes, PLI benefits) and indirect taxes (GST) available to local manufacturers. This along with China plus one theme (looking at supply alternatives to China) has provided the right enablers for potentially strong manufacturing growth in the coming years.

While some segments of the above-mentioned themes have re-rated, given the market rally, we believe longer-term opportunities remain in this space.

Which sectors could do well in 2023 and why?

Given the domestic growth, fundamentals are much better placed than others, India-centric themes like banking, non-lending financials, travel & tourism, engineering etc. appear interesting. At the same time, some mean reversion may be possible across areas like healthcare, staples, IT etc.

How’s the risk-reward for equity versus debt?

I think it is very important for all of us not to be too distracted by the current narratives and focus on the risk-return possibilities of each asset class along with one’s risk appetite & time horizon while deciding on the allocations. Given the context of relatively higher interest rates and likely global growth slowdown, the risk-reward for both asset classes appears to be evenly balanced. A market correction can create potential opportunities for long-term equity investors.

Should one look at international exposure as markets like the US and China are expected to play catch up next year?

International exposure helps in diversification and lends better balance to the portfolio given the lower correlation with domestic markets. They also offer an opportunity to participate in geographies & themes which are at a different scale & development stage compared to domestic plays. From that perspective Developed markets & other fast-growing/ emerging market countries offer interesting possibilities.

While some of these global markets have witnessed sharp price correction on a year-to-date basis, given the growth worries, higher interest rates etc. In our view, these international exposures should be considered from a perspective of diversification & relative uniqueness they offer to the portfolio allocation.