Indian markets may underperform in 2023; buy the dips: CJ George

Fears of a systemic crisis, after a series of bank collapses in  the US, and Europe dampened equity investment sentiment over the past week. The pain emanated due to high interest rates in the US. As the rates will stay high in the near-term, so will the pain in equity markets. Against this backdrop, CJ GEORGE, managing director and chief executive officer at Geojit Financial Services  told Nikita Vashisht in an interview that India may underperform global peers due to premium valuation in 2023. Edited excerpts:

The market sentiment remains cautious despite regulators taking proactive measures in the US, and Europe. What's worrying the Street?

The underlying issue is the high US interest rate, and it is expected to stay high in the short to medium term. Repercussions of high yields will affect the pricing of equities, and debt assets. The direct fallout is on the finance sector, but it can spill over to the broader economy, which is creating anxiety in equity/bond, and currency markets.

In India, the high valuations of companies is moderating. The market is responding to a potential economic slowdown, a downgrade in earnings growth, and quantitative tightening. A long-term investor, however, should not be worried about the volatility in the US market and its repercussions in the global market. The next one-to-three quarters would be the best time to accumulate equities of well managed companies. Given the issues in the US banking sector, monetary policy will become less hawkish in the future, which will be supportive for the equity market in the medium-to-long term.

How are equity markets likely to play out in 2023? Will developed markets (DMs) score over emerging markets (EMs)?

We have a neutral view on the equity market for 2023, and India may underperform other developed, and emerging markets due to its premium valuation, and slowdown in the economy. The consolidation during January-March 2023 has addressed a good part of the Indian market’s headwinds. However, this trend may continue in the short-term.

The second half of 2023 and CY24 are likely to be better due to less hawkish monetary policies and high inflation. As India's high valuation has declined, further decline is unlikely. I suggest buying the dips as India is expected to outperform DMs, and other EMs on a medium-to-long term basis.

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Are retail investors back home buying the dip?

The direct investment in the cash segment by retail investors continues to be muted. However, the investment through mutual funds is relatively steady and this is a very healthy trend. The volumes from new traders, which mushroomed during the Covid-19 period, has declined, while long-term investors are using 'buy on dips' as an investment strategy. The average daily turnover in the cash segment of the market has declined by more than a third on a yearly basis, so far, in CY23.

What could be the right investment approach right now? In which sectors have you increased your allocation over the past 3-6 months?

We have been advising a balanced portfolio with a mix of 40 per cent to 60 per cent in equities based on an investor’s risk appetite. The ongoing consolidation has improved the risk-reward for long-term investors. The market turbulence may persist in the short-term, and investors can increase their exposure to equities from 60 per cent to 70 per cent by the end of 2023, according to their risk profile.

We had been recommending Pharma, Power (Renewables), Infra, Manufacturing, and FMCG. However, given the heatwave, and El Nino concerns, we suggest investors reduce the holding in the FMCG sector. Additionally, we have turned marginally positive on the IT, and Chemical sectors on a long-term basis.

Category-wise, small-caps have become attractive due to the sharp price correction, and we suggest a weight of 10 per cent with a stock-specific approach.

Geojit Financial Services derives only 20 per cent of its income from the F&O segment. Why has the brokerage been conservative on the segment?

We are aware of risks associated with F&O trading. Safeguarding our clients’ wealth has always been our priority. So, we chose a path that is beneficial for our clients, particularly those who enter the market for the first time, guiding them to safer, and less risky modes of investing like SIPs and MFs. We have reduced employee incentives by 50 per cent for derivatives brokerage income to discourage relationship managers from pushing unsuitable products among retail investors.