As we go into 2023, we expect domestic economic recovery to broaden. Hence, we would be positive on sectors where economic recovery is incomplete, potentially benefit from disinflation in commodities and valuations are reasonable.
Blending these together, we are positive on rural consumption beneficiaries, domestic auto and healthcare sectors.
We anticipate recovery in rural consumption trends in 2023, benefiting from — better winter crop; higher rural-oriented spending in the pre-election year and early signs of improvement in non-farm employment. Thus, mass or rural consumption businesses will benefit.
Autos are yet to fully return to normalcy, which got impaired in the last five years, driven by high inflation and thus low real wages, supply-side challenges and margin pressure, given volatile commodity costs, etc.
With macro uncertainty likely to persist in 2023 as well, healthcare as a sector should do well, given its defensive characteristics and reasonable valuations.
What are the three sectors that you are bearish on and the reasons?
We are cautious on IT, metals and capital goods sectors.
We would still be cautious on global-oriented sectors as growth concerns are still persisting. In 2023, we expect concerns to shift from liquidity to growth. Thus, for global-linked sectors, concerns are likely to shift from valuations to demand outlook, which is not priced in sectors like Metals and IT.
In case of capital goods we have seen a healthy run-up in stocks over the last one year with greater revenue visibility on the back of strong order pipeline and the focus on infra growth story, localisation, efficiency-led capex momentum and favourable input cost/operating leverage tailwind. While we remain optimistic on the domestic infra growth theme given the Centre’s infra push as well as private capex gathering steam across sectors, most of the companies in the sector continue to trade at stretched valuation and thus we remain cautious on account of valuations.
One positive trigger for the markets that you foresee for 2023
Easing of geopolitical tensions could help restore normalcy in imported energy cost, which includes oil, coal and gas cost. This, in turn, could result in better trade balance and also need of central bank to protect currency.
One negative trigger you visualise for 2023
There has been significant monetary tightening in 2022, which will have impact with lag in 2023, particularly in the first half in the form of growth slowdown. Ex-China, global growth next year will be close to a recession. For now, it’s assumed to be a mild recession, although any worsening of duration of high interest rates needs to be tracked.
Neelesh Surana is Chief Investment Officer of Mirae Asset Investment Managers (India). He has over 26 years of experience in equity research and portfolio management.