2023: Investing in the Right Sectors at the Right Time

Jim Cramer of Mad Money is famous for saying, “There’s always a bull market somewhere.” While the general outlook for the economy and stocks may appear hawkish, and market indices are expected to stay rangebound for the foreseeable future, opportunities can always be found in certain pockets of the economy.

The above table highlights the importance of positioning your portfolio towards the right theme at the right time to generate decent returns, otherwise, you will be left with duds giving negative price returns, no matter how promising their fundamentals appear.

Here are few themes that did wonders for our WealthBasket Curators in 2022 and what are they excited about in 2023:

1)

2022

“For us, it was banking. Banks actually saw a lot of correction compared to Nifty and the normal weightage of banking sector in NIFTY reduced by drastic level. By all means, from a value investing perspective, we started building our portfolios in banking. 

When there is a rise in interest rates, PSUs in general – especially PSU Banks – do comparatively better because of their quasi-government status and easy access to capital. PSU banks were highly undervalued and could survive this thing.”

2023

“In fact, I think banking will also outperform in the coming year as compared to the other sectors. I think FMCG is also looking very good. The technicals and fundamentals for the top 3-4 companies are matching very well. 

Construction materials is something a bit for volatile but getting traction. Now that 2024 elections are due, the government will have to complete its infrastructure project. There is good traction on the charts as well.

Capital goods too are doing pretty well. L&T and Supreme Industries to name a few. This cycle was long time pending for Capital goods company which was pending and now it’s time.”

2)

2022

“Defense was such an offensive bet for us. All thanks to Mehul who manages our Monopolies and Distruptors WealthBaskets for allocating 25% of portfolios to it in Oct’21. 3 stocks we were heavily invested were HAL, BDL and Data Patterns, all of which have been amazing. Overall the sector has done well and our Monopolies WealthBasket has been our best performing WealthBasket.”

2023

“What we are inherently backing in 2023 is anything that is a government associated play from a policy perspective. So it can be infrastructure, PSU banks, cement, or defense.

In government, I am not talking about general PSUs or PSEs, but all government action affecting sectors. That’s the theme we would like to play in 2023.

This will include the PLI schemes, but we will assess which companies have how much of a PLI impact. Sometimes this is important to note because the impact on EPS is not that significant. Sometimes they are just getting reimbursement for marketing costs, for example.

From vanity perspective, these companies scream it out and invoke a favourable response amongst novice retail investors, but you need to dig deeper into understanding what benefit are they getting and what is the impact on EPS hence, over what period.

More importantly, is participation in the PLI changing the fate of the company by leading to additional opportunities and higher growth? That is the bigger question to answer to play this theme well.”

3)

Long term themes

“To be very fair, we are sector agnostic and look for opportunities everywhere. We are very risk-conscious, so we remain diversified across sectors and companies.

With that been said, few spaces that we like:

1. Banking and Finance – 

We believe that the worst is over for credit quality, corporate credit growth is going to pick up from here, and NPAs are mostly provided for through high PCR in banks. So all parameters for this sector are in the sweet spot.

2. Capex –

We were ahead of our time while betting on this theme. We were 1.5 years early catching this trend in the market. Most of the companies today are at life time highs and this is the beginning of Amrit Mahotsav of India’s capex story. I think we are at the inflection point, and we expect the trend to continue for the next 3-4 years.

3. China +1 –

We have been playing this theme for the last two years and will continue to play it through specialty chemicals and other companies. India has a huge opportunity here. What we have achieved in pharma over the past 10 years can be replicated for specialty chemicals.

4. Consumerism –

As the per capita income breaches that threshold, the aspirations of the right demographics in India will catapult India to an advantageous position.

4) 

2022

We communicated to investors regarding PSU Banks in Oct’21 and had written exclusively about it. PSU Banks had given terrible returns as per last 10 years up until 2020.

They used to attract a lot of attention in our quant research due to their great valuation. They traded at 10-20% value of private sector peers. But the problem with PSU banks was the NPA. The market was discounting this because EPS contraction was expected for medium to long term, which eventually materialized in 2010-20.

By the time we reached 2020, there was a lot of things that happened. Most of the NPAs were already out, so we know that the maximum damage had already been done. The government was making a bad bank, so all the NPAs would be shifted there. Bankruptcy codes were also reformed, which made the recovery of assets relatively less tedious. 

The best part was the credit growth. India is a country with a potential for credit growth of at least 15%, but since 2013, credit growth had fallen to 5-6%, most of which came from private banks. Share of loan assets for PSU banks fell from 80% to 61% during the time period.

Additionally, the government had great plans for infrastructure spending in the next 5 years, announced in 2021. There were plans for roads and renewable energy power plants. 

So the capex cycle was coming, loan books were clear of NPAs, and PSUs were trading at a significant discount. This was coupled with the rumor of privatization, which meant banks would be operating as proper businesses.

Idea was that eventually the discount of PSU banks would reduce compared to private peers from 80% to 30%. We expected this to happen over 3 years, but to everybody’s surprise, one year was enough.

On the factor front, the dividend factor delivered while momentum lagged because of stretched valuations. Low volatility protected against downside movement but did not give outperformance since India did not witness a bear market, unlike foreign markets. 

2023

We have seen rise in interest rates. Even by the hawkish market commentary, we expect terminal rate to be 5.1%. Most probably we will hit that rate by June’23 eventually stabilizing at those levels.

This can lead to a shallow recession which will kill the demand, because even employment numbers might touch 5% for the US, from current 3.5%.

Markets should start factoring in peaking of interest rate by Feb/March, which can result in Momentum Moguls to do really well. Value strategy will continue to give decent performance owing to moderated growth expectations and high interest rates.

Dark horse will be Growth Gurus for us since growth expectations are likely to witness re-rating post Feb/March period. Since all eyes are now shifted to value, we can expect a contrarian rally in growth. This is in contrast to how the market is treating value over growth.