IT Stocks | Pharma Stocks: ETMarkets Smart Talk: Smart money could flow from IT to pharma as recession fears mount in US: Anshu Kapoor

“Smart money can flow from IT to pharma as a best defensive investment in case of a sharp recession in the US,” says Anshu Kapoor, President and Head, Nuvama Asset Management (formerly known as ESL Securities Limited).

In an interview with ETMarkets, Kapoor said: “Potentially, all 3 segments of the economy – personal consumption, corporate CAPEX and government spending could converge to keep India’s economy in a growth zone of 6-7%” Edited excerpts:
The last month of 2022 started off on a positive note with benchmark indices hitting fresh record highs. What is your take on the market for the year 2023?

Market has rallied by 25% from the lows it had witnessed in the month of June. This was mainly due to no major downgrade to corporate earnings and inexpensive valuation based on expected FY24 earnings.

However, the Nifty50 is now currently trading at 20x FY24 and we do not see any valuation expansion in a higher interest rate regime.

So, broadly the upside will be in line with earnings growth of 12-15% over the next 1 year.

Indian market @record highs while the world is playing catching up. How do you see FIIs approaching Indian markets in 2023?

Markets are great at anticipating levels of economic growth and corporate earnings momentum and therefore, stock prices react well in advance.

We are one of few large economies showing resilience amidst a global slowdown, and our markets have accordingly paced ahead.

Responding to an increase in global interest rates and a diminishing risk environment, FIIs sold ~ US$ 55bn of Indian equities over the last 2 years.

As confidence in the Indian growth story solidifies – we believe, FII allocation to Indian equities will again turn positive – early signs are visible and encouraging.

What is your take on the September quarter GDP data?

Until last year, exports comprising merchandising trade and services (IT services, software) allowed the economy to rebound.

And now, there’s a beautiful transition to the domestic economy. This is a truly unique phenomenon globally and makes India stand out.

India’s famed consumption economy has held steady and continued to power our growth. A welcome surprise was our agriculture sector which grew above historical trends.

We are facing genuine headwinds in exports due to a global slowdown. For now, this is well compensated by the domestic economy.

Another factor to consider is the nominal growth of our economy (real growth + inflation). This powers consumer incomes (wage growth) as well as corporate profits in sectors that directly benefit (consumption, banking and financial services). Therefore, government tax collections (both direct taxes and GST) are at an all-time high.

What will drive Indian markets in the year 2023? Will earnings be the focal point or what us Fed does in terms of interest rates?
Prices have always been a slave of earnings over the long term and the same will be the case for 2023. Credit growth has picked up well on the back of consumption and investments.

Gross Capital formation has picked up after a long time and that will be the key driver for the Indian Markets. However, FPI flows have always been critical for the Indian market and that will be dependent on Fed’s quantitative tightening and eventually interest rates.

Top 3-5 factors according to you which could puncture the bull run on D-St?

Firstly, a sharp recession in the US can impact all our global-facing business leading to an earnings downgrade.

Secondly, a pullback of liquidity by the US FED can also result in meaningful deleveraging across global financial markets.

Amidst all these, any sort of geopolitical tensions can result in a spike in crude prices which has always been a key overhang.

Where do you see smart money moving (over-owned to under-owned sectors)?

With growth rates converging between IT and pharma and valuation at a significant discount, money can flow from IT to pharma as the best defensive investment in case of a sharp recession in US.

Do you see pressure on the rupee to continue in 2023 as well?

With the slowdown in the US, EM growth can converge with the US resulting in the dollar index appreciating again. Coupled with India’s BOP deficit in excess of $50bn and high-interest rates in the US we think the pressure on INR can continue.

Any top picks that investors can look at buying for the year 2023

We are positive on the following sectors:

• Banking and financial services

• Real estate

• Discretionary consumption

Do you see India-focused sectors doing well in the next year amid expectations of populist measures from Budget 2023?

Yes, definitely! Domestic consumption will remain the predominant theme. We expect the government’s drive to invest in infrastructure to continue, along with a renewed push to Make in India.

Potentially, all 3 segments of the economy – personal consumption, corporate CAPEX, and government spending could converge to keep India’s economy in a growth zone of 6-7%.

How do you see the fall of Crypto in 2022? Do you see the craze going down in 2023, and the blocked money could well flow back into equities?

I can list the following unresolved issues with Crypto:

• Not regulated by any securities regulator globally, including our own SEBI. Until this happens, investors and market intermediaries cannot find the necessary confidence to allocate their capital

• The premise of crypto being an inflation hedge hasn’t worked out. Therefore, it’s not clear what role does crypto potentially play in an investor’s portfolio (other than a speculative position).

• Investors have suffered massive losses – unlikely, these investors will build the conviction to invest more in crypto.

In the absence of any real data on holdings of crypto assets (and their current written down values), it’s hard to say if any meaningful re-allocation to equities will take place.

Equity investing by Indians is now very mainstream, as evidenced by the increasing trend in monthly SIP amount (~INR 14,000 cr now). I would argue this trend is enough to build our equities investing culture!

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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