The recent headlines in the US hint that we are in for a hard time. Technology companies are
experiencing the greatest volume of layoffs in the last two decades, credit card debt is rising by 15
per cent to almost a trillion dollars, small businesses are not able to pay their rent, cryptocurrency
has dropped and now crypto exchanges are failing, and most business owners are discussing a
recession. In order to partially manage out-of-control inflation (which is currently in the high single
digits) and to gain back respect, the Federal Reserve has been increasing interest rates at the fastest
rate in history. However, even with the Fed’s aggressive tightening, inflation is still high and not
reducing as expected. Interestingly, corporate profitability has surprisingly been quite solid.
Companies have been transferring the increased costs of inflation to their customers, thus
sustaining their profits. During this period, the US kept providing economic aid and thus the public
debt has been rising at a faster speed. As a result, the difference between the 10-year and two-year
US treasury has become inverted, which is a warning sign for a possible recession. The predicament
of the US Fed perfectly reflects the proverb “caught between the devil and the deep sea”. If the Fed
hikes up the interest rates, it could cause a major recession. On the other hand, if interest rates
remain the same, inflation turns unmanageable. The Fed has to strike a delicate balance, and one
reason why their attempts to control inflation have not been successful is because they have kept
relatively high liquidity for a while now. Liquidity has been declining lately, with about 95 billion
dollars being taken out each month. Although the Federal Reserve injected 4.8 trillion dollars from
the subprime crisis to the Covid crisis, they only withdrew 400 billion dollars. They’ll need to take
out more in the future. Will the Federal Reserve (Fed) keep interest rates higher for a long period?
The written statement released by Fed said no, but the Fed chair said yes. It’s likely they’re doing
this to keep the market and expectations under control. In the past, when the U.S. has increased
rates, it hasn’t lasted very long – it’s been similar to climbing a mountain and only staying at the top
for a short while. Before the subprime crisis, the Federal Reserve rate stayed at its highest level for
around 63 weeks, roughly for one year. In general, the Fed has acted like a mountaineer, climbing
and staying on Mount Everest, then going back down. This on-and-off stance of the Fed and its
economic data has been confusing as well as perturbing the investors, making them hold less in
stocks and more in cash to protect their portfolios against the fluctuations and volatility. The
primary concern is whether inflation will slow down as anticipated. Will it drop sharply as the cost
of goods has gone down due to the removal of fiscal stimulus, or will the inflation rate not decrease
as much due to the leftover liquidity in the system?
Today when the state of world economy has deteriorated, India stands out like an oasis in the
desert. If you look at the headlines today, many are positive; like Railway earnings up 16% YoY,
direct tax collection up 31 %, foreign exchange reserves crossing 550 billion dollars after a gap, 97%
of mobile used in India today are Made in India compared to just about 8% in 2014. There are certain
worries alongside. The September quarter earnings were impacted quite badly by inflation.
Manufacturing actually de-grew in the second quarter which impacted the overall growth rate. The
trade deficit continues to remain excessively high as exports have dropped. We do have chinks in
our armour but compared to the world, we look better. Capacity utilization now is at 17 quarter
high, quite comparable to the pre-pandemic levels.
The farm income is expected to grow higher
based on good Rabi crops. Rural spending by the government is increasing and that should bode
well for the Rural economy.
GST collection of Rs 140,000 Crs is becoming the norm for almost the
last nine months.
High inflation is impacting Growth. The trade deficit continues to remain excessively high as exports
have come down. High trade deficit is likely to put pressure on the rupee as well as on growth. Oil
as well as non-oil Imports continue to remain above our affordability range. One culprit for the high
trade deficit is our trade with China. This year our Imports will cross probably 100 billion dollars and
our trade deficit with China is likely to exceed 87 billion dollars which is more than our defence
budget. One more concern for India is that our recovering manufacturing sector is fuelled by
For India to grow on a sustainable basis we need our exports to accelerate as the export share (as a
percentage of the globe) is very low at 1.8%. It’s much lower than our Global share in GDP which is
roughly about 3.4%. For exports to grow, the government has launched Production Linked Incentive
schemes (PLIs). It has worked well in electronics and mobile phone sectors. Will it work in
semiconductors, automobiles, solar modules, batteries, Pharma, etc.? If yes, exports can bounce
back and help improve India’s market share in exports and support GDP growth further.
Debt is an important part of an individual’s portfolio as it brings stability. We believe over the next
one year, the gap in return differences between Debt and Equity is likely to be far narrower.
expectations globally seems to have peaked and falling commodity prices, withdrawal of liquidity
and increasing rates by global central banks indicate that the trajectory of inflation is now down.
The yield curve across Global markets has been inverted first time since 2000. An inverted curve
invariably signals recession.
The Fed as per Market expectation is supposed to raise interest rates
by March to April 23 to about 5 per cent. The market is also expecting the Fed to start cutting rates
somewhere between August to September 23 by 25 basis points.
The five to seven-year segment
provides a better opportunity for investment in fixed-income funds. If we talk about the funds,
investors should ensure that their time horizon and the funds’ investment horizon is aligned.
are looking to park money for a shorter period of time money market funds, savings funds and low-
duration funds will be more appropriate.
If you are looking at the medium-term to long-term view
then there funds like Corporate bond funds, floating rate funds, short-term bond funds, medium-
term funds and Banking and PSU debt funds, Bond Funds and Dynamic Bond Funds.
Despite four rate hikes by the Fed this year, Indian Equity has continued to rise. India has delivered
almost four times more returns than MSCI emerging market between 2014 and 2022. If you look at
it on a 10-year or a 20-year basis, we have delivered about one and a half times more return than
MSCI Emerging Market peers. India has made money for Global Investors, unlike most other
markets. Partly this performance is driven by our sustained valuation. Historically, we have traded
at a premium to Emerging Markets but right now the premium of Indian equities over other
Emerging Market is almost high at 139 per cent. This is partly because of the massive
outperformance of Indian markets over Emerging Market peers. As our performances improved,
our weight in MSCI Emerging Market has also increased from 7% cent in 2020 to 14.8 % in November
While markets are near all-time highs the rally is not broad-based as only 5 % of Sensex stocks
are at a lifetime high level, which means the rest of these stocks are still languishing at lower levels
despite a rise in the Sensex.
The other interesting thing about the Market is participation by retail
investors thanks to mutual fund distributors who took the message of SIP to every pin code of India.
Retail investors now send about Rs 14,000 crores a month for participation in equity mutual funds
through SIP. This has created a counterbalance to Foreign flows and more importantly reduced
In the near term, some investors may shift money to China on technical basis because of the very
cheap valuation and potential opening up of the Chinese economy in the longer term. We believe
India will be preferred by Global Investors because this is the country where rule of law and
democracy is visible and Global Investors can take longer-term calls of becoming an investor in India
rather than the technical call of becoming a trader in China. From a valuation point of view Indian
Equity provides an interesting observation.
Currently, we are trading at a marginal premium to our
historical Leverage, average historical PE is 18.5, we are trading at about 20 times. The Price to Book
historically is about 2.6 currently we are trading at about 3.2. Undoubtedly from a valuation point
of view, we are somewhere near our historical average the same thing looked from the Market
Capital to GDP ratio, we are now trading at a reasonable premium to our long-term average.
If you look at foreigners’ flow into Indian equity they did sell between October 2021 to June 2022.
But post-July 2022 they have emerged as a net buyer in the Indian Equity Market.
Outlook for 2023
1. Capex Cycle Revival
It is likely to be a volatile year with a roller coaster ride and hence having allocation between Debt,
Equity, Real Estate & Commodity is extremely important. This is not the time to be leveraged in
equity. This is the time to maintain a neutral allocation to equity and use any correction as an
opportunity to enter. We suggest marginal overweight to large cap, and marginal underweight small
and mid-caps. An equal allocation to equities as an asset class.
India Is at the Cusp of a Multi-year Capex Cycle. India is entering a big capex upcycle which would
provide a leg-up to the overall economy. Capacity utilization now is now at 17 quarter high
comparable to the pre-pandemic levels. Capex to depreciation ratio for all non-financial listed
firms is almost at a historically low level. The next phase of the recovery in domestic demand in
India will involve a pickup in private capex, aided by healthy private balance sheets and a
prudent policy mix.
Govt Focus on Defence, Railways & Infra
Budgetary capex allocation of both at a Central and State level has gone up considerably. The
Centre’s allocation to Roads, Railways, Defence has gone up in double digits. India’s defence
exports stood at a record ₹14,000 crore in 2021-22. As per media reports, the government plans
to sharpen its focus on infrastructure growth in the coming Union budget by allocating 30%
more funds for the roads ministry to speed up construction to more than 50 km of highways
3. Real Estate & Home Improvement
4. Penetrating Financial Services
5. Rural Revival
The next theme which we believe is the real estate and home improvement theme. In order to ride this revival in residential real estate we are quite positive on the home improvement space. We believe in the demand momentum revival. Real estate and home improvement sector will
benefit from both primary and secondary market demand.
The Indian financial services space seems to be in a sweet spot as foreign investors have made
a net investment of Rs 14,205 crore (USD 2.1 billion) in the sector in November amid strong
credit growth and a manageable non-performing loan portfolio.
The push for infra development and local manufacturing are going to directly help the rural
income levels. Be it the development of roadways or setting up of new plants and expansion of
manufacturing capacities, these projects are set to happen in rural areas only. This will not only
create jobs but will also boost consumption.
The higher MSP allocation would go a long way in helping drive consumption of FMCG products
in the hinterland. This would be highly beneficial for companies with a strong rural footprint and
would help drive growth for the consumer products industry.
6. Consolidating Industry Leadership
We are in an era where consolidation is happening across industries. A decade ago there were
dozen plus telecom operators now there are four. Across Industries such as Banks, Steel,
Cement, NBFC and Aviation we are seeing consolidation resulting into big companies becoming
bigger and strong companies becoming stronger. Survival of the fittest is the law of nature. It’s
equally applicable in the corporate world.
7. Capitalizing on Global Supply Chain Shifts
We see a structural push to manufacturing coming from the China+1 strategy (a strategy in
which companies diversify their businesses to alternative destinations other than China), and
PLI schemes and the next decade may probably see the rise of India’s manufacturing sector,
filling the missing piece in India’s growth puzzle.
The emergence of Europe +1 theme due to the
looming energy crisis in Europe would bode well for India as it becomes an attractive investment
destination given its lower cost advantage and macro stability of the country.
The views discussed here are as on 14th Dec, 2022 and are subject to change at any time based on market and other conditions.
This article is for information purposes only. The information contained herein is extracted from KMAMC internal research/different public sources. All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee thereof. Investors may consult their financial experts before making any investment decision.
The article includes statements/opinions which contain words or phrases such as “will”, “believe”, “expect” and similar expressions or variations of such expressions that are forward looking statements. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with the statements mentioned with respect to but not limited to exposure to market risks, general and exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc. Past performance may or may not be sustained in future.
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About Kotak Mahindra Asset Management Co. Ltd.
Kotak Mahindra Asset Management Company Limited (KMAMC) – a wholly owned subsidiary of Kotak Mahindra Bank Limited (Kotak), is the Asset Manager for Kotak Mahindra Mutual Fund (KMF). KMAMC started operations in December 1998 and as of 30th September 2022, has approximately 43.8 lakh investor folios in various schemes. KMF offers schemes catering to investors with varying risk – return profiles and was the first fund house in the country to launch a dedicated gilt scheme investing only in government securities. The company is present in 84 cities and has 89 branches as of 30th September, 2022.