ETMarkets Smart Talk: FY24 a good opportunity to invest and accumulate businesses that pass the Darwin test, says Jayesh Faria
“The correction in valuations presents a good opportunity to invest and accumulate businesses that pass the Darwin test – survived and thrived over time and have significant MOATs,” says Jayesh Faria, Associate Director, Regional Head- West, Motilal Oswal Private Wealth.
In an interview with ETMarkets, Faria said: “Sustained slowdown in India, as well as the world, is a very real possibility, but the decoupled nature of Indian equity markets to the economy should prevent large-scale drawdowns,” Edited excerpts:
Q) We are down by about 10% from highs. What is your take on markets amid global headwinds for FY24?
A) Markets have experienced a perfect storm over the last 15 months, with the conflict in Ukraine and erratic lockdowns in China limiting the supply of energy and goods, respectively, heavily impacting inflation globally.
The headline indices have experienced a not-so-tepid correction in valuations, with the small and midcap indices valuations suffering the most.
The correction in valuations presents a good opportunity to invest and accumulate businesses that pass the Darwin test – survived and thrived over time and have significant MOATs.
Higher inflation will keep central banks honest, and higher interest rates as a consequence will keep asset prices in check – the era of free money is over.
For India, we feel Q4-FY23 results will be in line with expectations, and hence we may not see any serious correction in prices, although long-term domestic demand is constantly being called into question will keep asset prices in check in the short term. A sustained slowdown in India, as well as the world, is a very real possibility, but the decoupled nature of Indian equity markets to the economy should prevent large-scale drawdowns.Q) As we step into FY24, which sectors are likely to be in the leader and laggard category?
A) The banking sector is likely to lead earnings growth for FY24E, given the steady pick up in credit growth, with improvement in asset quality.
The capital goods sector could also continue to do well, although valuations are slightly expensive; hence, allocation needs to be very stock-specific.
The IT sector could see some impact due to a slowdown in the developed economies, while the Consumer sector has been affected due to some slowdown in demand in rural areas & could take a couple of quarters to show notable recovery.
Q) What is your take on SEBI changes made recently on AIF, Debt market, disclosure norms, ESG. What message does it give out to the wider investor community?
A) SEBI has been very clear in their communication through various changes in the last few years that they want all participants to keep investors’ interests at the forefront.
They also want wider participation by retail investors, making sure that they remove any discrepancies which look favorable to any asset class or products in India. They also want to ensure that small investors or stockholders do not get marginalized and increase their confidence in the markets and achieve the overall objective of increased household participation in the market currently, at extremely low levels.
Q) Do you feel fears of the global recession in FY24 are real? If yes, how will it impact India and India Inc. in terms of earnings?
A) We feel the global recession has already arrived and will impact everyone across boundaries. India will also feel the same as export-oriented sectors will see pressure on top line & margins.
We may also see lower participation by FII in our markets since global interest rates have gone up.
India Inc will likely see earnings growth in the low double digits in FY24E; hence, our market will be better positioned versus the global markets and surely will be favourable in terms of emerging markets with the recent time correction it has witnessed.
Q) More than 50% of smallcap stocks are down more than 60% from their 52-week high. Does this mean that this space could see a rebound in FY24?
A) We feel this space is starting to look attractive as markets have corrected and earnings growth has increased, making valuations appealing, yet growth is at a significant premium.
More pain can be witnessed in this category since most of these players do not have pricing power. All the market leaders are still trading at significantly high valuation premiums, and hence, earnings growth is key to further re-rating.
Q) We are seeing a gradual fall in SIP – is it attractive FD rates or equity markets being range bound?
A) We feel it’s not because of bank deposit rates; equity fund SIP and bank rates are part of two different & non-correlated asset classes. The main reason for the fall in SIP is rangebound market and no returns nearly for 21 months.
People do SIP for rupee cost averaging, but due to flat markets that are also not looking appealing to investors and also they have not seen any returns. Hence, this is viewed as the loss of opportunity compared to risk-free rate or fixed bank deposit rates and hence, allocations have started to slow down in SIPs.
Q) What would be the ideal asset allocation for someone who just started earnings with Rs 12 lakh per annum? How can he/she start a crorepati journey? Will SIP work, and what is the kind of saving that needs to be made every month?
A) Asset allocation is the holy grail of creating wealth, and someone who has just started earning should look at changing the savings equation from traditional to a new equation like “ Earrings – Savings = Expenditure”.
They have to define their short-term and long-term goals since age is at their side with more allocated towards equity where the eighth wonder of the world – “compounding” will help them in their journey of superior long-term wealth creation.
Q) What are your key learnings from FY23?
A) People often forget that history may not repeat itself, but it surely rhymes. Cycles are a given in the markets, and this wasn’t the first down year and will not be the last.
The last decade was characterized by low-interest rates. We may see a sustained period of higher interest rates over the next few years, and investors will have to get used to lower returns in equities than we have had over the last few years.
The world is also getting fragmented further, and globalization is slowly receding. Cycles always turn, and this one will too. We need to have patience and not lose during down cycles.
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