In general, we are bullish on financials and also for the next year. In the past, private-sector financials have performed by not only doing well on their own but also taking market share from state-owned banks. The banking sector is well-capitalised, overall credit growth is high at around 18 per cent these days, and there is much better borrower behaviour because the government and the system are tough on errant borrowers. In the past few years, there have been few big corporate and infrastructure loans, etc. so, asset quality in general is reasonably good.

The other sector that we generally like is the consumer sector, which is catering to the urban or the middle class. Everywhere, including in India, the rich are becoming richer and unfortunately the poor are becoming poorer. There are around 300 million people who have money, are improving their lifestyle amid improving job opportunities and have growing aspirations. We are not talking about the top 1 per cent but the next 20-25 per cent consumers. We are focussing on low-ticket items that consumers buy. The shift from unorganised to organised and the online shopping trend help the listed companies in this consumer space. Think of the urban middle-class going out and eating at QSR restaurants, buying branded shoes, clothes, bags...that sort of consumption.

Portfolio Podcast | Sectors that look most promising for 2023  Portfolio Podcast | Sectors that look most promising for 2023  
Sector(s) that you are bearish on and the rationale

For the first time in 26 years, we have had zero exposure for many months in technology (IT services). There seems to be dissonance. There is clear slowdown in the world. Big banks and Big Tech are giving out pink slips. A part of this IT business is discretionary, and that component has to come down if the US is slowing down. So, in that environment, it will be foolhardy to think that Indian IT will not be affected because they have generally been signalling that they are not affected.

Budgeting cycles will be impacted, so IT service firms might do some shorter projects, but the more substantial transformational deals will have to wait. Plus, some portion of global business comes from Europe, the UK, and those geographies are badly affected. The other thing is, IT companies are trading at 15-18 per cent premium to Nifty compared to the average of below 10 per cent and we think that they should currently trade at below the long-term average. We have to wait at least for April when IT companies guide for the next year and right now they cannot positively surprise.

We are also not positive on consumer durable-type companies. There are just too many of them making ACs, refrigerators, microwaves, etc. There must be high competition and that is not conducive.

A positive catalyst that you expect in the next one year

If the world calms down then that would be a big catalyst. This means that US inflation comes in control and then may be the in war in Ukraine finishes. Another positive could be China opens up properly.

A negative catalyst....

The real negative is any geopolitical issue, but we can’t foresee it. The general negative is that US inflation doesn’t fall, and rates are higher for longer. Those rates are not good for us. For instance, India cannot have 6.25 per cent rate if US is at 5 per cent.

FIIs are returning to India after almost a year of selling. Why do you think this is happening? The US Fed stance hasn’t changed...

All markets have generally done well since end June, bringing back some calm and confidence. Generally, FIIs are net buyers of Indian equities or in fact all equities. In the last 25-odd years, they have been net sellers in India in any calendar year less than five times. The natural inclination for FIIs is to buy as the world grows, save and some part of that flows into equities. Foreign Investors are either investing in public market or private market and are clearly positive on India if we see their private market flows. All we are saying is that don’t assume that FIIs’ default option is to sell. India’s relative attraction has also improved a lot. If you look at India versus China, India versus Europe, India versus the rest of the world, definitely India’s position has improved.

What is your take on India’s valuation relative to other market at this level of Nifty PE ? Is a premium valuation justified because of higher growth or is it an overvalued market?

First of all, India itself has not gone up this year. Therefore, our valuation premium has gone up because prices in other markets have fallen. There are many specific reasons for them to have done badly but that is not our fault by any means. If our market kept on going up and others had lagged, then you may argue that this premium has to be reversed. But this is not the case here. Our own prices or valuations have not increased. What has happened is that for specific negative reasons, markets have done poorly in China, Europe and the US. Now if we don’t have those issues in our market (whimsical polices by Chinese government, war in their background in Europe, high inflation in the US) it is but natural that our relative valuation will increase. It is still not the case that these problems in other markets have disappeared, so it is wrong and unfair to call our market overvalued. Over time, some of this premium may dissipate as other markets recover (once their fundamental problems have reduced) and we may underperform but if those markets do well, we will also go up in absolute.

Samir Arora, founder and fund manager at Helios Capital, is considered one of the popular market voices and has three decades of investing experience