Investment upheavals defined 2022; what should your investing decisions be in 2023?

The year 2022 will be remembered as one of extraordinary upheaval for investors. Reflecting the volatile year, the benchmark S&P BSE Sensex swung nearly 13,000 points from the low of 50,921.22 on June 17 to a record high of 63,583.07 on December 1. Incidentally, the Sensex has given a return of 5.29 per cent on a year-to-date basis till December 16, 2022, while the Nasdaq in the US is down by around 30 per cent and China’s Shanghai Composite by 15 per cent.

So, where are the markets headed in 2023? “Strong earnings trajectory continues in the Nifty 50 universe. We foresee Nifty EPS [earnings per share] growth of 11 per cent, 14 per cent and 13 per cent in FY23, FY24 and FY25 [respectively],” says B. Gopkumar, MD & CEO of Axis Securities. Currently, the Nifty, the benchmark index of the National Stock Exchange, is trading at an EPS of `832 and a price to earnings ratio (P/E) of 22.4. He sets the target for the Nifty—that closed at 18,269 on December 16, 2022—at 20,400 for 2023.

According to experts, the relative outperformance of the Indian market is likely to sustain in 2023, driven by favourable macroeconomic factors and improved fundamentals of Indian corporates. A good monsoon, a cool-off in commodity prices, and a healthy job market would also be beneficial.

Value vs momentum

But what are the strategies and themes that might work in 2023? “The strategy for 2023 would likely be a story of two halves, where the first half would be more value-driven as cost of capital will continue to be on the higher side and the second half will be led by earnings growth proxies as central bankers would look to pivot from the monetary tightening cycle,” says Pankaj Tibrewal, Senior VP and Fund Manager (Equity) at Kotak Mahindra Asset Management Company.

In FY22, value-based strategies did much better than momentum-based ones because of the rise in interest rates and a focus on profitability. “The outperformance of value stocks is likely to continue in the first half of CY2023, led by a pick-up in credit growth and a recovery in domestic cyclical stocks. Growth as a theme could come back by mid-2023. By then, we could reach the peak of the interest rate cycle,” says Gopkumar of Axis.

Notably, India is among the few major stock markets that delivered positive returns in 2022. But indicators suggest that the market is overvalued. According to Motilal Oswal, in P/E terms, the MSCI India index is trading at a 155 per cent premium to the MSCI EM index, a historic high. This is against the historical average premium of 64 per cent. “The trend will continue and perhaps value will continue to perform in India with relatively inexpensive sectors likely to perform better in CY23,” says Nitin Bhasin, Co-head of Ambit Institutional Equities and Head of Research at Ambit Capital.

The key market themes

While various themes emerged in 2022, the performance of the domestic equity market was supported by favourable government policies. For instance, the Union Cabinet approved 50 per cent financial incentives for the manufacture of semiconductor fabs across technology nodes as well as for compound semiconductors, packaging, and other chip facilities. With the government focussing on performance-linked incentive (PLI) schemes for the manufacturing sector, will the space emerge a winner?

“We believe that the manufacturing sector will gain further momentum in 2023. India could emerge as a global manufacturing hub in the next few years as multiple triggers indicate that we are on the cusp of a revival in this sector. These triggers include the Make in India initiative, PLI-led incentives, a competitive tax structure, and balance sheet strength of the Indian corporates,” says Gopkumar.

Along with manufacturing, housing and banking will be the two other sectors to watch out for in 2023, given their improved economic outlook and the pick-up in credit growth, say experts. Moreover, affordable housing may get a further push in the upcoming Budget.

Gopkumar believes that the demand momentum in the commercial vehicles (CV) segment is likely to sustain, and he expects the CV cycle to maintain its impetus driven by the pick-up in economic activities and the government’s focus on infrastructure.

Large, mid or small-caps?

The key to successful investing is diversification. All three indices—large-, mid-, and small-caps—have been moving in tandem since last year. But, while large-caps have given returns of 5.29 per cent YTD, mid-caps have given returns of 3 per cent and small-caps just 0.20 per cent. What should be part of your portfolio in 2023?

Ambit’s Bhasin is overweight on large-caps. “Higher reinvestment rates for growth and reasonable valuations make us prefer relatively large caps,” he says, adding that mid-caps are currently expensive, given the high expectations of growth and margins driving punchy valuations. Kotak’s Tibrewal believes that a portfolio with a good mix of large-caps (to hedge volatility risk) and secular earnings growth across mid-/small-caps should be the right approach. A bottom-up portfolio strategy focussing on companies with leadership, low leverage, high cash flows, growth surprises ahead and reasonable valuations would be ideal for superior risk-adjusted returns in 2023.

SIPs and debt funds

Experts say a long-term investor shouldn’t be too worried about market volatility. Besides, investing through systematic investment plans (SIPs) is a good way to beat the market’s choppiness. It helps you invest a certain amount at regular intervals so that you can beat the volatility by averaging out the buying cost over the long term.

In addition, you must also be aware of the most tax-efficient market investment. For instance, if you don’t exhaust the limit of `1.5 lakh under section 80C with compulsory investments and expenses, invest in an ELSS (equity-linked savings scheme)—one of the best tax-saving instruments. “It gives average returns of around 12-14 per cent, it can save tax of up to `46,800 and above all, it has the shortest lock-in period of three years among all 80C options,” says Gauri Chadha, a tax expert.

There are also other instruments, like debt funds. These have not done well lately, giving returns of just 3-4 per cent, since the RBI has been increasing the repo rate—the rate at which banks borrow from the central bank—over the past year, leading to rising yields across maturities, and prices going down. But experts say there is greater opportunity to generate returns in debt now compared to three years ago. S. Naren, ED & CIO of ICICI Prudential AMC, says that the 13 years between 2008 and 2021 saw quantitative easing by global central banks. “Corporate India could easily borrow at very low rates (close to zero) globally [then]. Today, that is no longer the case given that banks have moved on to quantitative tightening and rates have risen. This would translate to corporates borrowing more domestically, which is another reason debt becomes interesting,” he says.

The mantra for 2022, Naren says, was practicing asset allocation and being systematic with equity investing. “Now, in 2023, we are continuing the same and have added that investors should consider investing in debt mutual funds,” he adds. For prudent investors, 2023 could turn out to be exciting. 

@Tanya_aneja0209