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Building a Strong Portfolio in 2023 to Leverage India's "Amrit Kaal"

Updated: Sep 25, 2023

In quest of sharing investment wisdom with our clients and prospective investors, here is our article in EconomicTimes.com Market Moguls which is an an elite platform, where the who's who of Indian financial markets blog on investment wisdom, strategies and challenges of investor interest. In this exclusive feature, we explore the essence of India's Amrit Kaal, a transformative phase teeming with opportunities. As we enter 2023, it's crucial for investors to grasp the significance of this auspicious period and fortify their portfolios to leverage the immense potential of the Indian market.

Synopsis


Despite challenges such as rising oil prices and a possible poor monsoon, India is emerging as a winner in the sluggish global environment, offering sustainable growth opportunities, according to a report by Economic Times. The banking system is well capitalised, with improving asset quality and the country's strong balance sheet continues to support growth. India also has plans for upcoming reforms in areas such as ONDC (online commerce), OCEN (credit to businesses) and decarbonisation. FY24 is expected to mark an inflection point for the country.


Complete Article at ET Market Moguls


After a correction that lasted four consecutive months, the Nifty index is up 1.3% on a year-to-date basis. However, Nifty has underperformed in the last six months due to high relative valuations and challenges involving one of the prominent corporations.


In contrast, global markets, particularly China and Europe, have outperformed in the recent six months due to lower valuations.


The Indian market faces challenges such as rising oil prices, a heat wave, and the possibility of a poor monsoon. Despite this, retail investors continue to show interest in investing in Indian markets, while domestic institutions have sold shares in recent times.


India is emerging as a winner in a sluggish global environment, providing a sustainable growth opportunity.


The IMF predicts global GDP growth will fall from 3.4% (2022) to 2.8% (2023), with advanced economies experiencing a more pronounced slowdown. However, Asia's domestic demand has remained strong despite the monetary tightening, and the region is projected to contribute more than half of global growth this year, driven primarily by the recovery in China and resilient growth in India, with India being the fastest-growing major economy in the world.


The latest inflation numbers in India have been encouraging, falling quicker than projected due to rising interest rates, sluggish growth, and dropping crude oil prices.


However, food inflation and the second-order influence on service inflation continue to limit the rate of decline. Despite rapid rise in interest rates, high inflation, the banking crisis, and feared systemic risk, India's external situation remains robust, as do the balance sheets of consumers, corporations, and governments. The primary question remains whether a rate cut would take place in 2023 by central bankers globally.


The near term:


As the fiscal year approaches, attention shifts from the macroeconomic situation to corporate performance and business strategy. The base effect of the pandemic has faded away, and the recovery phase has now transitioned to a slowing growth phase.


Export-oriented industries like IT, Pharma, Chemicals, and Auto Ancillaries are expected to experience sluggish growth, while domestic sectors like banks, urban consumption, and luxury goods are likely to remain strong


Discretionary sectors may experience slower growth than in the past, and industries that have experienced a significant increase in raw material costs are expected to recover their margins. Banks are expected to see growth in profitability, driven by credit expansion and improving asset quality.


Capital goods and auto ancillaries are expected to experience a surge in order book, while consumption may see slower growth due to inflation and competitive pressures.


The metals and mining sector may be negatively impacted due to lower pricing and margin pressure, while the cement sector may benefit from lower raw material prices.


The inflection point:


The global market outlook remains uncertain due to various challenges such as the war in Europe, rising oil prices, inflation, higher interest rates, and increasing COVID cases worldwide.


Equities and risk assets are expected to be adversely affected as central banks withdraw up to $800 billion of stimulus. However, China's economy has bottomed out and is showing signs of revival, while India's strong balance sheet continues to support growth.


India has demonstrated remarkable antifragility over the past few years, consistently turning threats into opportunities.


The country's banking system is well capitalised, with improving asset quality, and its external position remains manageable, ensuring a low likelihood of systemic risk.


India's success in vaccine rollout, fiscal and inflation management, policy advocacy, and technological advancement has garnered international acclaim.


Upcoming reforms in areas such as ONDC (online commerce), OCEN (credit to business), and decarbonisation provide a multi-year path for the country's growth. Despite ongoing challenges, India is emerging as a winner in a sluggish global environment, offering sustainable growth opportunities.


Corporate leaders who can transform their businesses to meet the demands of changing times will likely succeed. This involves investing in technology to meet the demands of both loyal customers from past generations and the new millennial/Gen Z generations, building a versatile talent pool with new technology and execution skills, creating an agile supply chain, and establishing a robust ESG framework that prioritises environmental responsibility, inclusivity, and engaged governance.


Looking ahead, Nifty's one-year forward valuations are close to long-term averages at 18.5x, with room for upside at 16.5x for FY25. Nifty earnings are expected to grow at 14-16% CAGR for the FY24-FY26 period.


Private banking, fast-moving consumer goods, and select manufacturing/auto companies are expected to perform well. As inflation declines, discretionary consumption is expected to return, while export-oriented themes may take a back seat but return later in the year.


Key monitoring factors include the monsoon, oil prices, and election results. FY24 is expected to be an inflection point for India, with the divergence between developed and domestic markets likely to accelerate.


Once inflation drops, interest rates fall, and global liquidity smoothens, the earnings trajectory will accelerate towards the year's second half.


Build a portfolio and stay invested in India's inflection point of 2023 for a fulfilling investment experience of Amrit Kaal.



Sumit Poddar

Chief Investment Officer & Smallcase Portfolio Manager

Tikona Capital



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