2023 – Fall and then strong rise Thursday, Mar 09, 2023 by: Mr. Madanagopal Ramu, Head - Equities and Fund Manager, Sundaram Alternatesposted in: PMS Articles We, at Sundaram Alternates, expect 2023 to see two opposite phases of economic conditions, globally as well as in India. In the first half, high interest rates will impact global growth, while in the second half, inflation should be fairly under control, globally as well as in India, leading to a strong recovery supported by both monetary and fiscal stimulus by Central Bankers (CBs). Last 3 years can be easily described as the most volatile period of the decade. Covid had a profound impact on human life and business stability in 2020-2021, which led to an unprecedented monetary support from central bankers (CBs) across the countries. Supply side constraints led to a spike in commodity prices and elevated shipping costs, thereby hurting the cost of doing business and ease of global trade. As the global economy recovered from Covid’s impact, the Russia – Ukraine war dealt a severe blow to the recovery. Energy cost spiked leading to the resurgence of inflation and supply side constraints. China slowdown due to the zero-lockdown policy, gave a helping hand in controlling a part of the inflation pain, led by the falling basic commodity prices across industries. As we come to the end of 2022, inflation concerns seem to have clearly peaked out, but are still far away from comfortable levels. As we step into 2023, the key risks to watch out for would be 1. The persistence of high interest rates and its impact on global growth, 2. winter and its impact on energy prices and 3. China re-opening and its impact on commodity prices. On the positive side, 2023 will be a year of a more stable global supply chain after a long period and can help in better trade conditions. China re-opening can help global growth and help in further improving supply side constraints. India probably will be among the least impacted of these global headwinds supported by strong domestic consumption trends. Robust urban job markets, few timely regulatory and political measures have helped India to control the inflation trends and have helped navigate the global macro pressures smoothly. But India cannot escape the impact of the global slowdown, exports are already showing signs of weakness, and this can marginally impact the GDP growth rate expectations for 2023. But Indian equities have outperformed peers meaningfully during the current year enabled by higher allocations from foreign funds. A major driver for the additional allocations were uncertain economic conditions in China due to lockdowns and marked slowdown in Europe due to the energy crisis & war and the rising interest rates & weak demand hurting the US. This has protected the major indices from a fall despite an earnings cut in 2022. As we move to 2023, we expect that some of these variables may reverse and can lead to an inline or marginal underperformance compared to major global indices. We, at Sundaram Alternates, expect that 2023 -24 will be a stock pickers market compared to the last 3 years where we witnessed a much broader market participation supported by global liquidity supporting all asset classes. The broader market performance extended in 2022 as well, supported by foreign fund flows shifting from China. But in 2023, as the global liquidity tightens, as India allocation moderates and global economic growth comes under pressure, performance will become more skewed towards specific sectors and stocks. The valuation premium which quality stocks get over weaker companies, even within an industry, reduced during the last 3 years and in 2023, we expect this trend to reverse, particularly from the second half of 2023. Quality growth stocks are likely to outperform defensive and high beta names in 2023, because the valuations have become more reasonable now. Utilities performed well in 2022, supported by energy crises created by the war and we expect that in 2023, defensives may struggle to outperform the broader market as the base catches up in the earnings. Sectorally, we expect high growth cyclical sectors like financial services, consumer discretionary and technology companies to outperform compared to defensives and global commodities. The outperformance will mostly be back ended and will be noticeable post the noise of the rate cut emerges in H2 2023. Private Banks & NBFCs offer a great opportunity given the compelling valuations and earnings growth expectations. Driven by robust urban job markets, consumer discretionary should continue to grow and outperform. We also like specific manufacturing sectors like specialty chemicals. By far, the only clear winner of the China +1 and Europe +1 seems to be specialty chemicals and it can deliver a strong outperformance over the next 2 years. In Industrials, the team at Sundaram Alternates a contra view, at least for 2023. Very high expectations and valuations can lead to a meaningful underperformance in this cyclical sector during 2023 as global growth slows down during H1 2023. We expect demand for new capacities to get postponed globally in 2023, except for a few sectors. Our strategies [click here to know more about the products offered by Sundaram Alternates] reflect the outlook mentioned above through our 4×4 wealth multiplier themes 1. Financial inclusiveness – here we play the growth opportunities in retail credit penetration and shift from unorganised to organised lending. 2. Consumer “Czars”– we are positive on urban discretionary consumption growth, particularly in small ticket spending where we expect robust growth to continue supported by healthy urban payroll addition and wage growth, 3. Phygital “Bluechips” – here we play beneficiaries of India’s online penetration across various sectors, and lastly 4. Export Voyagers – we believe that CRAMS, CSM and CDMO players in speciality chemical and pharma space will deliver a high earnings growth driven by the continuous flow of new projects on the back of the China +1 or Europe +1 trend. Disclaimer: Securities investments are subject to market risks and there is no assurance or guarantee that the objective of the investments will be achieved. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements.