We are starting 2023 with a very different environment. In 2022, when we started, the assumptions were that interest rates will go higher, tech stocks had reached a humpty-dumpty level and would crack and the assumptions were that it would be a tough year for the world in general. Some of those assumptions have turned out true. It is only the pace and the impact of geopolitical war that has challenged 2022. What are the key assumptions for 2023 on the macro front, on the earnings front and also on the valuation front?
2022 was a year when SIP triumphed over FIIs and clearly no one would have predicted that SIP can easily beat FIIs so well and 2023 will be a year when debt will be a great asset class. For the last three years from the time Covid happened and interest rates were brought down in India to very low levels, debt was an uninteresting asset class. 2023 will be a year where debt becomes an interesting asset class for many investors.
So 2023 will be the year where people will consider debt as a part of their portfolios because for the last three years they were getting very subpar returns in debt and that is going to change in 2023 and that will be the big change in my opinion from a domestic investor’s point of view. Otherwise, we are in a period where valuations of India are completely out of sync with the world because India has a great structural story and whether you look at the structural story or at the valuations is a tough debate from an investor’s point of view for anyone outside the country and for anyone inside the country as well.
No one knows which of the two will triumph, whether the valuations being high will create the problem or whether the structural story will work in favour. That is a problem because only one of them can work in 2023. If we take a five-year horizon, the structural story will work but in the shorter term, only one of them can work and that is a challenge.
It looks like China will open their economy decisively in 2023. What will that do to metal demand and energy prices. Inflation may peak out but would China’s comeback challenge it?
It is not like at all points of time in the cycle people believe that every cycle will be the same. There is no need for China to keep investing the way they invested in the 2002 to 2008 cycle. You can have a different cycle. Clearly they are going to have a consumption demand boom, there is no doubt about it.
The population has peaked. So, why should they keep constructing houses the way they were constructing houses in the earlier periods? They need to softland the real estate cycle and that is what the government will do. After all, it is a centrally governed economy. We always tend to think that each cycle will be the same cycle and even if China were to reopen, it would be a different cycle.
Clearly, they are going to have Chinese tourists go out of the country in a much bigger way than what they did in the last three years and we will have a consumption boom much bigger than what we had over the last three years. But we do not need to have a Chinese real estate boom on the lines that we had in the last decade because simply we did not have population growth like what we had in the 2000 to 2010 period. That is where there will be a difference and geopolitically also things are very different from 2000 to 2010. The rest of the world and China want to embark on a different technology boom and each of them want to protect their own technology and that is also something which will be different from what happened between 2000 and 2010 and what we are going to see at this point of time.
So we will have parallel technology progress in both the continents and that will also be different. It is going to be interesting. Having said that, will we have more inflation due to China reopening? Certainly, but in what products? Did China actually create a big petroleum reserve in 2022 because their demand went down? No one knows because it is not a country which is transparent like the US where you know the petroleum reserve has become much smaller. So I think it is going to be interesting.
Now, will India have to compete with China for emerging market money? In some cases yes and in some cases no because India is unique in its own way and if emerging markets get money, both China and India will benefit. We tend to think that the dollar has peaked. Look at the way the yen is rallying against the dollar. The dollar peak is very much done somewhere in 2022 October, November and I do not think is a problem for 2023.
A style which you represent – value or in Hindi terminology sasta, sundar, tikau made a comeback in 2022 in power and power utilities. Do you think that we are in for a two-three-year market style where value will beat growth?
We are asked this question periodically but the fact is over 18 years, value has delivered and there will be periods of time like 2017-18, 2006, 2007, 2008 where value failed and we will have these kind of things. Value is something which will keep changing. For example, right now, pharma looks like value.
If you look at the last seven years, in almost all but two years, pharma has done worse compared to the benchmark. So what is value will keep changing and we will see that power possibly still has a very good cycle and maybe power will still be value but pharma would certainly constitute value at this point of time.
Despite the fact that the midcap and smallcap indices have not done that well, many of the midcap and smallcaps constitute exactly the opposite of value at this point of time because many of the smallcap and midcap stocks are today trading at price to books which are extremely high so they do not constitute value.
I believe that at different points of time, different things will constitute value and we will find that we will still have those kind of benefits. For example, we have still been believers in upstream oil as a sector although we moderated our call on metals, we never moderated our call on upstream oil because they were all very cheap sectors and despite various reasons, we found sector reasonably cheap because oil is a consumption item, metal is a capex item and it is not dependent on whether China creates a capex story or not.
We had these kinds of views and we believe that value as a theme will not go out of fashion for the next 20 years or 30 years as well. What is value will change at various points of time.
I have caught you saying the word consumption quite a bit and you believe that the next decade belongs to the entire consumption sector. If one is looking at investing in this sector structurally over the next few years, how do you believe they should be playing this theme?
Look at a sector like a two-wheeler for example. The volumes today are much lower than what it used to be five-six years back and that is because many of the two-wheeler consumption prices also went up substantially because of regulations like BS and various other ways. At some point of time, two-wheelers is a basic product whose volumes have to go up.
If one looks at the two wheeler industry at some point of time, one is going to see consumption pick up in that sector. Healthcare as a sector is a secular trend for the next 10 years, 20 years, 30 years so that is another trend. One cannot have healthcare underperform for a sustained period of time because India is underpenetrated in healthcare in a very big way so it cannot have a situation where for the next 10 years, 20 years, 30 years it can underpenetrate whereas many of the discretionary categories are trading at valuations which imply that we are going to have sustained growth for the next 20 years at very high rates of growth. So one gets to see some clear moderation when one looks at it from a value style.
From a growth style, many of these stocks may still look very attractive but from a value style, some of these stocks are not attractive at this point of time. Having said that, India consumption, India infrastructure, India as a space is not something which can be said to be unattractive with a decade view because India is one of the few growth stories over the next one decade and that is something everyone accepts at this point of time. But it is not growth at a reasonable price at this point of time. It is growth at a not cheap price at this point of time. If at some point of time the valuations were to correct, it would become extremely interesting to go extremely overweight on equity in India because the structural story available at a reasonable price will become an extremely attractive story.
