The last trading session of 2022 was decent for the Indian market, especially in the context of what is happening across the world. But what about 2023? If you look at the other analysts, they believe it will be a year of no return or very low returns. What is your call?
2022 was a nightmare for the general market as such. Of course when one looks at it, relatively it appears that we did well compared to what the Dow or the Nasdaq were doing, but overall, I do not think too many people ended up making a lot of money on a portfolio basis.
You might have had a couple of stocks going up here and there, but on a portfolio basis, we struggled with 2022. But in 2023, we are hugely and outrightly optimistic and bullish. What led to a normalised or less than normalised or may be negative returns in 2022 were interest rates and 2023 interest rates cannot be hiked that much more. Sooner rather than later, we will have the much awaited Fed pivot on interest rates. All we need is a couple of more bad data for the US economy. The US drives the entire globe and so I think 2023 should be very good and the stocks and sectors that did badly in 2022, should do better in 2023.
Recently, we have seen a resurgence of investor interest in financials and even midcap banking names. After the IL&FS crisis, we hardly ever saw midcap names in fine banking and financial space do well. What is the market telling us?
Even with these midcap PSU banks, whether it is
or a or all these midsized PSU banks which have made money for investors, they were all doing a one-side value readjustment. Stocks make money over the long run when there is growth and when the bank expands business that is more lending. But this was a one-time value adjustment. We do not own them. I can talk about second tier private sector banks, which I think will do much better in 2023 because those were the ones which were showing some growth and that is where the focus should be.
I think banks and other financials will do well because in a low interest rate environment, they are supposed to do well and the much talked about trades will take a back seat.
The e-commerce or the newly listed space saw a lot of supply coming in because of unlocking private equity who were able to sell. These are technical reasons but they have had an impact as far as pricing and valuations is concerned. Is that a space to look at now?
E-commerce is not about supply and demand. When the sentiments are good, all supplies get absorbed and when the sentiments are bad, there is just complete lack of demand and even a miniscule supply breaks the back.
In the e-commerce space, the internet players are more of a Nasdaq derivative and the Nasdaq is doing terribly at the moment. Most of the stocks are down 40, 50, 60%. So maybe the profits will take two more quarters to come. But I think it is more of a Nasdaq output. One should not look at these stocks in isolation.
When the market falls and say a stock you are holding falls 7%, the first thing you do is try to find out if there is any news that led to the fall. If there is no news, then just these stocks are not strong right now. If the Nasdaq does well, these stocks will do well; if it does not do well, these stocks will not do well. But for the long term, obviously it is about earnings, cash flows and how they expand business. In the short term, the markets are blind.
As we are stepping into the brand new year, any new resolutions like say this year you are going to focus on smallcaps rather than the largecaps?
The biggest resolution is do not be a Rambo in the market thinking that your stocks will deliver earnings and they will go up. If the markets fall, everything will fall. This took me maybe about three decades to understand and really accept it in reality but no matter how good your company is, no matter what earnings they deliver, if the underlying market is collapsing, your stock will fall. So this is the new resolution.
You might say why did it take you so many years to understand this but that is how it is! In Hindi we say, jab jago tab savera (when you wake up, it is morning), but yes on another note, 2023 will be the year for mid and smallcaps because the largecaps have had a rally and the midcaps cannot be left behind.
It is like the parents running far ahead than the children. The parents will wait for the child to catch up and we have seen that in the past but for small and midcaps to do well, you want sentiments to be better, you want the Fed and the RBI to cut interest rates or at least pause or give you a dovish outlook. But that is when they will do well. Midcaps are already doing well. It is now the turn for the smallcaps.
But the other thing you said was that this would be a year of a bit of a contrarian view in terms of what underperformed in 2022 is likely to do better in 2023. Does it then make a case to let us say buy the IT companies, pharma names, etc, that had been underperforming and book your profits in PSU banks?
You have already been saying that the large retailer, the consumer facing companies are already seeing some kind of a sluggishness. They are over-owned and so the money seems to be moving back into the sectors that were really underperforming in 2022. IT should do well.
We have been holding IT for the last several months. They have not been moving up and down. In IT, it is all about the Nasdaq. If the Nasdaq bottoms, IT will bottom; if the Nasdaq does not bottom, IT will again struggle. The Nasdaq is all about interest rates. If the Fed comes and stops the interest rate hikes, they will do well.
It is all related directly, indirectly to what Powell would do next month or next quarter. About the pharma names, after the real 2020 Covid run. They have never had a long sustained bull. They do well in parts when there is a Covid scare, they do well suddenly for two, three, four months and then they start coming down. The trend is not visible in pharma that it was earlier.
We do not own pharma but it is so much of an issue because pharma normally is lacking to deliver on the earnings front. This would affect the real outperformance from the pharma space as such.