DSP Mutual Fund calls its outlook for this year
2023: It’s a Relative World.
??highlights of the note by DSP Mutual Fund in this article
First off, a review of the last year, interestingly titled:
2022: Many decades compressed???in a year.
We experienced -
??Sovereign debt built up like the 1940s
??Inflation like the 1970s
??Policy tightening like the 1980s.
Fed's most severe tightening??measures in the past 60 years to control inflation.
The classic 60/40 portfolio (US large-cap stocks / 40% US long-term treasury bonds) ?? 22% loss?? in 2022.
This was the 2nd largest loss on record, and the largest since 1931.
In India, FIIs were net sellers ??
??FIIs sold ~$30b worth of assets in H1 of 2022
??Put in ~$10b by H2, net outflow ~$17b
??But DIIS gave crucial support to the Indian market:
??DIIs offset outflows, invested additional ~$34b
??Consistent monthly flows into MFs, averaged ~$1.5 billion
Positives for Indian Investing:
??Growing shift towards long-term investing + financialization of household savings
??Increasing preference for financial assets over physical assets (eg real estate & gold) helped stimulate domestic economy + drive economic growth.
India outperformed, relatively.
??MSCI India USD Index down ~8% in 2022, making one of the better-performing markets globally.
??Outperformed the MSCI Emerging Markets index by ~ 18%
??And the MSCI Developed Markets Index by ~ 10%
India’s Bottom-up Drivers??
Healthy b/s of the 4 pillars - corporate, household, government, banks.
- Banks with ample liquidity
- Corp. earnings growth strong ~65% b/w FY20-22
- Corporates & h/h continuously de-leveraged
- Govt's fiscal consolidation focus
India’s Top-down Drivers
Strong policy action from RBI and Govt’s policy initiatives:
???Consistent monitoring of inflation dynamics and interest rates
??Pro capital expenditure budget
??PLI schemes to encourage private capex
??Simplified labour law codes
??Encouraging GST & direct tax collections
??ECLGS for rural and the bottom-of-the-pyramid during pandemic
???Strong hiring & salary increases in the services export sector -> urban demand recovery
??India’s m-cap as % of the global m-cap reached highest levels in history.
?India moved up from the 9th largest economy in 2010 to the 5th largest in 2022.
DSP Mutual Fund is optimistic on India’s growth story.
Here are the factors it believes drove, and will continue to drive this growth:
??Reformist policies
??Favourable demographics
??Culture of entrepreneurship
India’s Corporate Scorecard
??Revenue growth ~10% CAGR, based on DSP Mutual Fund ’s analysis of NSE-500 cos* FY19 - FY23 (TTM)
??EBITDA margins trending below FY19 levels
??ROE is marginally ahead of pre-covid levels at 14% (TTM FY23).
*(excluding Financials)
?ROE improvement in
??IT
??Materials (mainly Metals)
???Consumer Discretionary
??Utilities
?ROE contraction in
?Energy
??Consumer Staples
??Telecommunication Services
??Industrials
??Net debt to equity at comfortable 51% -> strong balance sheet of corp India
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Near-term trends
? Margin pressure continues but relief expected as commodity prices have cooled off in recent months.
? Urban consumption continues to be robust, while the rural economy is still hurting.
??Banks seeing strong pick up in credit growth, broad-based recovery across retail, corporate, and micro, small, and medium-sized enterprises (MSMEs).
??Auto
??Cyclical recovery in PV and CV (3-yr CAGR)
??CVs grew at 12% in 2QFY23 due to improving freight availability, government infrastructure spending, and replacement demand.
??PVs grew by 18% due to a high order book and production ramp-up.
??Cement
??2QFY23 saw a multi-year low profitability
??Blended EBITDA/ton fell??50% YoY, 41% QoQ to a multi-quarter low of Rs 600
??Volumes strong, 8.5% YoY growth (3-yr CAGR: 7%)
??Profitability expected to recover
??Consumer Durables
Volatility in quarterly growth, but saw double-digit growth (3-year CAGR) in the last 5-6 quarters
??IT
??Top 10 IT companies reported better-than-expected growth with resilient order bookings
??Hiring remained high, indicating near/medium-term growth visibility
?Lower attrition meant EBIT margin started bottoming out
??Pharmaceuticals
??Formulations market in India expanded at a healthy rate.
??Sustained traction across chronic and acute segments + price increases of 5-7% supported the overall growth.
Navigating 2023:
Important to consider -
??Metals, FMCG, & Consumer Durables currently trading at 1.2 - 1.6 standard deviations above their 10-year averages
??Oil & Gas, Infrastructure, Pharma & Banks trading below their historical averages.
??2022 was challenging for the “Quality” factor.
??One of its worst years since '08 in US
??But has been one of the best-performing factors, 2nd only to “Momentum” since '07.
??In the past, recovery of this factor has often been gradual.
??In contrast, the “Value” and “Momentum” factors tend to exhibit more significant fluctuations.
?? DSP Mutual Fund recommends investors be cognizant of these behaviours.
??2 key risk factors: Interest rates + Growth
??Central banks prioritizing inflation over growth currently
??Signs that inflationary pressure may be decreasing
??Growth slowdown possible -> further downward revisions in the near future
??Current multiples for Indian markets are high historically
??Returns from these levels have been moderate in the past.
??MSCI India Index is trading at ~21X Forward PE
India Story is Real
Structural turnaround accelerated by a number of factors:
??De-leveraging by corporates
??Increased capacity utilization in the manufacturing sector
??Government investment in infrastructure
??Well-capitalized banking system
??No. of SIP a/c 2x to 60m (30m in ‘19)
??No. of MF portfolios 100m+
??No. of demat accounts 100m+ - 50% YoY increase
??Flows of EPFO + insurance in equity markets rising
??Poised to be the 3rd largest economy & stock market by 2030
DSP Mutual Fund recommends a Balanced Approach
??Not prudent to exit equity when valuations are high. Instead, be pragmatic.
??Rebalance portfolios to have the appropriate mix based on your own goals and risk profile.
??Investment discipline is critical factor for success.
Lastly, some fund house specifics.
DSP Mutual Fund entered privates with its first pre-IPO transaction through alternate investments desk (offshore)
DSP Mutual Fund is looking at ESG integration built on 3 pillars: Climate Risk, Diversity, and Innovation. Goal of active ownership.
That was a round-up of DSP Mutual Fund 's 2023: It’s a Relative World.
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