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Conditions are favourable for a pick-up in private sector capex, says HDFC AMC’s Roshi Jain

Policy tightening efforts by the Reserve Bank of India (RBI), normalisation of supply chains and pent-up demand after Covid will help contain the inflationary pressure in the economy, said Roshi Jain, Senior Fund Manager – Equities, HDFC Asset Management Company Limited, in an interview with MintGenie. More so than ever, it is the time to be extremely disciplined about stock and sector selection rather than being tactical amidst the volatility, she said.

In the interview, she shared her expectations from the Budget and market this year, preferred themes and more.

Q1. What are your expectations from the market in 2023?

In 2022, most central banks globally including the RBI have taken steps to rein in inflation by raising interest rates and engineering a withdrawal of surplus liquidity in the system. The transmission of rate hikes through the economy and the tightening of liquidity will impact economic activity in different sectors to different degrees and with different time lags. Pent-up demand post Covid reopening has also in large measure been catered to in 2022 which means that 2023 will have neither the benefit of pent-up demand nor benign financial conditions. Hence, 2023 will perhaps be a year where some growth challenges come to the fore. Rising interest rates increase the opportunity cost (discounting rate) for equity markets. In the context of Indian markets trading at a premium on near-term earnings compared to their long-term averages and also trading at a significant premium (that expanded further in 2022) to global markets, we should brace ourselves for volatility.

However, 2023 will also be a year where several structural drivers which are expected to positively impact our economy over the long term would continue to consolidate and drive our economy ahead – drivers such as infrastructure build-out, a resurgence in manufacturing and private capex and greater formalization. Therefore, more so than ever, it is time to be extremely disciplined about stock and sector selection rather than being tactical amidst the volatility.

Q2. What are the prominent sectors in your portfolio for this year?

India’s growth opportunity over the medium term is well diversified with growth likely across consumption, manufacturing, infrastructure and services sectors. We endeavour to stay diversified via good quality and attractively valued companies that have the ability to traverse business/economic cycles while avoiding companies where performance is due to only short-term unsustainable factors. The accent is on companies with medium-term growth drivers, disciplined capital allocation, and strong governance framework and which are trading at reasonable valuations.

We believe several macroeconomic factors provide opportunities for the Indian corporate sector and our attempt is to invest in companies which have suitable business models to take advantage of these factors. Conditions are favourable for a pick-up in private sector capex. A favourable policy regime towards domestic manufacturing, policy support for clean energy and green technology and MNCs looking to diversify their supply chains should drive private capex and a resurgence in manufacturing. Corporate, household and banking sector balance sheets are also robust. Structural drivers such as a growing working age population, rising incomes, and greater penetration of goods and services continue to provide a favourable backdrop for corporate India.

Q3. Please share your expectations on the Budget in 2023.

We believe that the Budget will continue to drive the agenda of the government which we believe focuses on fiscal consolidation, targeted social welfare, greater self-reliance in manufacturing and thrust on infrastructure. The recent announcement by the government of sunsetting the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) and making food grains free under the National Food Security Act (NFSA) is a pointer in that direction.

Q4. The RBI has been hiking the interest rates to control the growing inflation. How long do you think this practice of repo rate hikes would continue?

We believe the tightening efforts by the RBI and normalization of supply chains and pent-up demand post-Covid will help contain the inflationary pressures in the economy. The future trajectory of interest rates will be a function of the growth-inflation trade-off judgement that the RBI makes but it appears that we may be closer to the peak for now with respect to the repo rate in India. As equity investors, the important thing to my mind is to differentiate between the transient impact of macro developments and the more lasting or structural impact of any of the developments. I believe we have now moved to a regime of tighter financial conditions globally than what we experienced over the last several years.

Q5. The banking sector has done spectacularly well in the past year. Do you think there is more steam left in the banking space?

In our view, some of the banks have long-term competitive advantages and will be able to capture growth opportunities in a risk-calibrated manner. India’s credit penetration in both the corporate and retail segments is still lower than in peer economies. The continuing formalization of the economy and the use of technology is helping expand the lending pool for banks. The above factors in the context of an economy that has several growth levers provide the banking sector with multi-year growth opportunities. Banks that are well placed by virtue of their business models to take advantage of these growth opportunities in a risk-calibrated manner should do well over the long term.

Q6. What is your advice to new investors in the market?

Investors should invest with a long-term horizon and in line with their individual financial goals and risk appetite. Sound and disciplined asset allocation can help investors tide over intermittent volatility in financial markets while helping with long-term wealth creation. Starting early and staying diversified is key to wealth creation over the long term.

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First Published: 06 Jan 2023, 08:04 AM IST

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