'CY23 will be a volatile but rewarding year for Indian equity investors'

We expect high single-digit to low double-digit returns for equities in CY23, with preference for mid-caps over large-caps, Jitendra Gohil, director, global investment management at Credit Suisse

It has been a scrambled five months for Indian equity markets. Jitendra Gohil, director, global investment management at Credit Suisse Wealth Management India, in conversation with Puneet Wadhwa, says he expects a high single-digit to low double-digit return for Indian equities in calendar year 2023 (CY23), with a preference for mid-caps over large-caps. Edited excerpts:

When do you see Indian equity markets exiting the phase of consolidation?
 

CY23 will be a volatile but rewarding year for Indian equity investors, with the purpose of consolidating in the first six months, followed by recovery in the second half. We continue to hold this view but acknowledge that recovery has been somewhat earlier than anticipated.

It is customary for equity markets to consolidate after strong rallies. The Morgan Stanley Capital International (MSCI) India Index has delivered over 21 per cent compound annual growth rate for the past three years (in US dollar terms) versus the MSCI Asia ex-Japan Index of just 4 per cent. It has outperformed all major Asian markets, such as South Korea, Malaysia, Indonesia, Singapore, and China, over three years.

Corrections offer good buying opportunities in Indian equities, as the country offers one of the best structural growth outlooks.

What are the key risks markets are ignoring right now?
 

The banking crisis in the US in March and the ensuing interventions by authorities have endorsed equity markets as they helped temper down the US Federal Reserve’s (Fed’s) aggression in reining in inflation at any cost.

The risk is that the Fed tightens further in June defying market expectations, the dollar gains significant strength, and commodity prices soar as a consequence of geopolitical imbalance or prospective China stimulus, even if these outcomes are not part of our base-case scenario.

What is your overall market position? Which sectors are you overweight/underweight on?
 

We expect high single-digit to low double-digit returns for Indian equities in CY23, with a preference for mid-caps over large-caps.

Fast-moving consumer goods-allied sectors are likely to do well, as rural demand recovery shows signs of green shoots. We hope for a demand revival ahead of the general elections 12 months from now.

Consumer discretionary companies, including automotive, multiplexes, restaurant chains, etc., also appear sanguine, as supply-chain worries subside and input cost pressures ease off. The valuation, too, is reasonable for these stocks.

Non-banking financial company, real estate, and the banking sectors are our favourites at this point in time and can post good earnings growth.

We have been negative on the information technology sector for over a year now; however, we expect limited downside from here on out.

In cement and capital goods, we have started to book profits. Metal, telecommunications, and energy are our underweight sectors.

What is your interpretation of the 2022-23 (FY23) January-March quarter (fourth quarter, or Q4) results?
 

Our view is about 5 per cent cuts to consensus earnings estimates for 2023–24 and 2024-25. The Q4FY23 earnings season has been reasonably better than expectations. The outlook commentary has been mixed. But the silver lining emerging is an improvement in sequential margins.

In particular, consumption in rural areas, which has been weak over the past few quarters, has started to sprout some green shoots. By and large, before the elections, we expect rural consumption to pick up.

What is prompting the sudden optimism of foreign investors germane to Indian equities?
 

At the beginning of the year, India’s valuation premium versus China’s was at a record high, and it was clear the flows would move away from India into China.

After the initial reopening euphoria, the recovery in China has been disappointing, and the country is facing some structural issues as regards its real estate sector and leverage. The sentiment is also weak due to the US-China trade and geopolitical tensions.

Conversely, the Indian economy remains on sure ground. Moreover, concerns about highly leveraged conglomerates in India have receded in the past three months. While India is the only major economy with zero probability of a recession in 12 months, foreign portfolio investor (FPI) holdings in the BSE 500 are at a 10-year low, which was unwarranted.

Do they find market valuations acceptable now?
 

Some FPIs are still concerned about India’s relatively higher valuation in comparison to the historical average. We believe India deserves to trade at a higher than historical average on an absolute and relative basis, given the marked improvement in relative macroeconomic as well as corporate fundamentals.

The risk to our call could be a sharp interest rate hike in the US and significant strength in the US dollar. This is not our central-case scenario, though.

Alternatively, if China starts to provide a significant stimulus to support its economy, we might see FPI outflows from India.