2022 was an extraordinary year - Geo-political conflicts, record high inflation, supply side concerns, skyrocketing commodity prices and then retracing, Europe’s energy crisis, fastest pace of rate hikes, and China’s continued lockdown, it was a series of shockwaves for the global economy to grapple with. Even while the world navigated such turbulent times, India emerged as an oasis of growth with the resilience of its markets and economy. 2023 appears to be a year of transition. The year when we see Central banks continue their efforts to tame inflation, global growth slowing down, rates peaking out but remaining higher for longer. The lag effect of tighter policies of 2022 on growth will play out in 2023.
Even as global equity markets have all seen a meaningful correction in CY22, India has been an exception giving positive returns. Sustenance of such outlier performance may be difficult in a world of connected markets and supply chains, but India’s strong long-term fundamentals, robust policymaking, and steady domestic equity flows is likely to keep the momentum.

Domestic focused themes and sectors preferred to global cyclicals

In the current environment, we prefer companies that have a domestic focus as the Indian economy is likely to significantly outperform the global economy. India is in a relatively better position – with a more domestic-demand driven economy, political stability, increased government spending supported by high tax collections, and an uptick in private capex boosting investment going ahead. Over a longer term, positive levers in the form of strong political leadership driving the pace of reforms, demographic dividend, China+1 strategy, Domestic Manufacturing, and Digital push should drive India to become the third largest economy by 2030. No major downside risk is seen to earnings growth in the near-term as domestic demand is resilient, rural recovery is expected going forward, credit growth is on an uptrend, and commodity prices have seen contraction from the highs. Corporate India remains in good health with balance sheet deleveraging and lower interest rates over the last two fiscals. Overall, Corporate Profit to GDP is showing a turnaround and India seems well positioned to enter a new profit cycle.

Key themes of interest in 2023

Banking & Financial Services (Private Banks, select NBFCs)

The connectedness of money makes banking and financial institutions one of the most important sectors of any economy. India’s economic expansion, rising incomes, government reforms, and digital adoption will drive the demand for financial services across the population. Indian banks’ earnings are entering a sweet spot, with substantial revival in earnings expected post the clean-up over the last few years. India is also on the verge of a new capex cycle. A new capex cycle is also positive for future credit growth and a key parameter for the banking sector’s performance. Non-banks and housing financiers balance sheets have significantly beefed up during covid through a mix of equity raising and higher provisioning and are well positioned for strong growth.

Discretionary Consumption (Retail, QSR, Auto, Hotels, Rural recovery related)

Discretionary consumption is expected to be resilient with upper-income consumers seeing good job and wage growth, and low-income jobs being created again with re-opening of the economy. Rural economy is also expected to see recovery on the back of normal monsoons, expectations of good Rabi crop, and elevated crop prices. India’s per capita income has crossed $2500 and is set to increase in the coming years. Rising per capita GDP has a disproportionate impact on disposable income, which, along with low penetration across discretionary categories, should drive strong growth in consumer discretionary spending.

Domestic Manufacturing (Industrials & Capital Goods, Defence, Specialty Chemicals)

India is set to witness the fastest rise in working age population and our labour costs are anyway significantly lower than peers. This makes India an attractive manufacturing destination. The Production Linked Incentive (PLI) scheme will benefit multiple industries and kickstart manufacturing in more than 14 sectors. In addition, Government of India has undertaken various other steps to promote manufacturing sector and to boost domestic and foreign investments in India. These include introduction of Goods and Services Tax, reduction in corporate tax, interventions to improve ease of doing business, FDI policy reforms, measures for reduction in compliance burden, policy measures to boost domestic manufacturing through public procurement orders, Phased Manufacturing Programme (PMP), to name a few.

Digital and New Age Tech (IT, Digital)

India has been at the forefront of technology adoption and has built a unique and robust public digital infrastructure to drive digitization. This massive digitization driven by India stack, is also making way for new business models and making way for new technology led opportunities available across various industries globally, in areas such as Electric Autonomous Connected Vehicles, Medical Tech, 5G, AI & Digital Products, Digital Manufacturing, and Sustainability. Aadhar and UPI’s success is spurring creation of shiny new public digital infrastructure with potential for new unlocks

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. ABSLAMC/the Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments. The sector(s)/stock(s)/issuer(s) mentioned in this presentation do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sector(s)/stock(s)/issuer(s).

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.