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

“Smart money can flow from IT to pharmaceuticals as the best defensive investment in the event of a deep US recession,” said Anshu Kapoor, President and Chief Executive of Nuvama Asset Management (formerly known as ESL Securities Limited).

In an interview with ETMarkets, Kapoor said, “Possibly all 3 segments of the economy – consumer spending, business investment and government spending – could converge to keep India’s economy in a 6-7% growth zone.” Edited excerpts:
The final month of 2022 started on a positive note with benchmark indices hitting new record highs. How do you assess the market for 2023?

The market has recovered 25% from the June lows. This was mainly due to the company’s earnings not being downgraded materially and the valuation based on expected earnings for FY24 being favourable.

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

So broadly speaking, the upside potential will come with earnings growth of 12-15% next year.

Indian market @record highs as world catches up. How do you see FIIs approaching Indian markets in 2023?

Markets are excellent at anticipating levels of economic growth and the momentum of corporate earnings, and as a result stock prices react well in advance.

We are one of the few major economies to have shown resilience amid a global slowdown, and our markets have performed accordingly.

In response to a rise in global interest rates and a declining risk environment, FIIs have sold ~$55 billion worth of Indian equities over the past two years.

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

How do you rate the September quarter GDP data?

Up until last year, exports of goods and services (IT services, software) ensured an economic recovery.

And now there is a nice transition to domestic economy. This is a truly unique phenomenon in the world and makes India stand out.

India’s famous consumer economy has held steady and continued to fuel our growth. A welcome surprise was our agriculture sector, which has grown above historical trends.

We are facing real export headwinds from a global slowdown. For the time being, this will be well compensated for by the domestic economy.

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

What will drive the Indian markets in 2023? Will earnings be the focus or what is the US Federal Reserve doing in relation to interest rates?
In the long run, prices have always been a slave to profits, and they will continue to be in 2023. Credit growth has picked up nicely thanks to consumption and investment.

Gross capital formation has recovered after a long time and that will be the main driver for Indian markets. However, FPI flows have always been vital to the Indian market and that will depend on the Fed’s quantitative tightening and eventually interest rates.

The top 3-5 factors you think could punctuate the bull run on D-St?

First, a severe US recession could affect our entire global business and result in an earnings downgrade.

Second, a withdrawal of liquidity by the US Federal Reserve could also lead to significant deleveraging in global financial markets.

In the midst of all this, any kind of geopolitical tension can lead to a surge in crude oil prices, which has always been an important overhang.

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

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

Do you also see pressure on the rupee in 2023?

With the slowdown in the US, emerging market growth may converge to that of the US, which will lead to renewed appreciation in the dollar index. Coupled with India’s BOP deficit of over $50bn and high interest rates in the US, we believe INR pressures may continue.

All the top picks investors can buy for 2023

We are positive on the following sectors:

• Banking and financial services

• real estate

• Discretionary consumption

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

Yes, in any case! Domestic consumption will remain the dominant theme. We expect government efforts to invest in infrastructure to continue, along with a renewed push to manufacture in India.

Potentially, all three segments of the economy – private consumption, business investment and government spending – could converge to keep India’s economy in a 6-7% growth zone.

How do you see Crypto’s fall in 2022? Do you see the excitement fading in 2023 and the blocked money could well flow back into stocks?

I can list the following unresolved issues with Crypto:

• Not regulated by any securities regulator anywhere in the world, including our own SEBI. Until that happens, investors and market intermediaries cannot find the confidence to allocate their capital

• The premise that crypto is an inflation hedge has not proven itself. As such, it’s not clear what role crypto potentially plays in an investor’s portfolio (other than a speculative position).

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

In the absence of real data on crypto asset holdings (and their current depreciated values), it’s hard to say whether a meaningful shift into equities will occur.

Stock investments by Indians are now very widespread as evidenced by the rising trend in monthly SIP amounts (now ~INR 14,000 cr). I would argue that this trend is enough to build our equity investment culture!

(Disclaimer: Experts’ recommendations, suggestions, views and opinions are their own. These do not represent the views of Economic Times)