Focus on value stocks in 2023; HUL, Power Grid, HDFC Life top picks: Geojit’s Satish Menon

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In an exclusive interaction with Business Today, Satish Menon, Executive Director at Geojit Financial Services, shared his views on next year’s market prospects and advice for investors, which may help them to structure a strong portfolio.

Indian equity benchmarks are ending 2022 on a slightly higher note with BSE Sensex and NSE Nifty up 2.92 per cent and 2.82 per cent, respectively, so far. A couple of sessions away from stepping into 2023, investors would be keen to take cues on how to trade in the new year, while keeping an eye on the recession that has potential to knock on the doors of global indices. They would also be curious about whether the domestic indices — which scaled their fresh peaks earlier this month — would be able to extend their gains in the fast-approaching year or not.

In an exclusive interaction with Business Today, Satish Menon, Executive Director at Geojit Financial Services, shared his views on next year’s market prospects and advice for investors, which may help them to structure a strong portfolio. According to him, value buying, domestic-oriented sectors and buying on dips would be the key strategy for the year ahead. Here are the edited excerpts: 

What lies ahead for stock market next year? What could be factors that will influence market sentiment?

The long-term outlook for the world’s stock market has improved compared to 2022, despite speculation about recession. The improvement is due to price consolidation, a recovery in global supplies, fall in energy costs, and moderation in the inflation forecast. However, the ongoing volatility is expected to continue in the near-term because of high interest rate and slowing economy. As a result of its premium valuation and downgrade in earnings, India is expected to underperform other EMs. On a positive note, a fall in inflation and change from hawkish to neutral monetary policy can do wonders for the market trend. A bounce in developed and emerging economies will support the domestic market to provide a positive return despite underperforming.

Should one expect double-digit returns for Sensex, Nifty next year?

We can expect a modest return for the domestic stock market on a short to medium-term basis. On an annual basis, we can expect 5% to 10% return, depending on the performance of the developed and emerging markets, which are dodging the risk-off strategy due to high interest rates. Stock and Sector specific picks will be the key ahead.

What factors do you think can hurt market sentiment in 2023?

Currently, the market expects a mild non-structural recession in 2023; however, it will be a significant concern for the market if it deepens into a fundamental problem. Bond yields and interest rates that are now high are anticipated to moderate from H2CY23. If it sustains high throughout the year it will be an issue. Covid cases are mounting in East Asia and if Covid’s zero tolerance policy sustains in China, it will impact global supplies, provoking inflation to stay high.

What are your top large and midcap picks and why?

We believe that value buying is the theme of 2023. Fair valuation, steady earnings, and a robust demand scenario will be the cutting parameters. We suggest stable and defensive businesses like FMCG, Non-durables, Power, Pharma, and IT sector as safe and good accumulation ideas for 2023. Companies with expensive valuation and high Debt /Equity ratio can be avoided. Invest in pockets that are likely to benefit from a drop in international commodity prices. Some of the other sectors on which we have a positive view are hospitality, entertainment, and media due to increased activities in international and domestic tourism, travel, trade, media consolidation, and a rise in online subscriptions and offline footfalls.

Some stocks on which we are positive are HUL, Power Grid, HDFC Life, Zydus Lifesciences, Tech Mahindra, Tata Consumer, Symphony, ONGC, BPCL, Indraprastha Gas and Zee Ent.

Is the worst behind for new-age tech stocks? (Paytm, Zomato, Nykaa, PB Fintech)

In terms of stock price, the worst may be over on a short to medium-term basis. The stigma of low cashflow generation/profit and expensive valuation, however, continue to drag the segment. Most of the aforementioned stocks are not in our coverage to comment with recommendation. Given that EBITDA margin losses are reducing, and the management is focusing on long-term growth and profitability, we have a bullish outlook on Zomato.

What would be your advice to investors going into 2023?

If you are a long-term investor, continue to hold your good stocks, irrespective of the volatility, and if you are investing via SIP, please continue the same. Holding a balanced portfolio with a universal mix of 60/40 in equity and debt is a safe composition for an average risk averse investor for 2023. Value buying, focusing on domestic-oriented sectors and buying on dips should be the strategy ahead. Avoid panic selling in a volatility-expected-year. Investors should increase the weightage on equity during a correction during the year. A healthy return from debt paper is expected in 2023-24 due to a rise in interest yield.

Do you think retail flows may stay strong despite recent tepid returns?

Retail inflows into direct equities, are expected to be muted, in the short to medium-term, due to accumulated losses and lack of churning opportunities. The performance of the stock market is expected to be subdued, especially in H1CY23, but I do not expect this to affect the SIP inflows into Mutual Funds. For a rise in retail inflows, we need to see an improvement in market sentiment, which is likely in the later part of the year depending on the economic growth, fall in inflation and interest rates. DIIs’ strategy is also expected to be cautious in 2023, affecting market liquidity.

Do you see a lull in the IPO market after recent tepid listings?

Yes. In the short to medium-term, the outlook for the IPO market is muted in anticipation of a volatile stock market on the cusp of a recession. A similar effect will be on investors and corporates’ appetite. The availability of liquidity from institutional and retail investors will drop due to the subdued performance of the current portfolio. Global risk-off will reduce FII inflows. Similarly, corporates have lost the allure to fund through equities due to low valuations affecting prosperity for promoters and private investors implying high dilution of capital. The need for IPO funding has also reduced as private expenditure continues to be slow. Majority of IPOs in 2022 were OFS for listing gains rather than for capex needs.

First published on Business Today

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