“We assume over here that while the banking cycle might change to their benefit, the effect will come towards later half of the year but we will see a lot of the traditional manufacturing firms that use relatively high levered balance sheets and instead of zero, 1:1 debt to equity ratio, might succeed in this cycle,” says Deepak Shenoy, Founder, Capital Mind
The market positioning changes every year. 2020 was all about fintech, consumer tech, digital, everything was getting digitised. So IT did well. In 2021 the reverse happened and banks came up, IT went down; PSU stocks which were at the bottom of the barrel came up; growth took a back seat, value came back. What will be the construct of the portfolio in 2023?
We have a very different setup right now. If you look at where the market is, we are looking at a much higher interest rate cycle in terms of both lending rates for banks and deposit rates for banks because that has also gone up. We are seeing the RBI saying that we may be closer to the end of the rate hiking cycle, but we are not sure.
The market positioning changes every year. 2020 was all about fintech, consumer tech, digital, everything was getting digitised. So IT did well. In 2021 the reverse happened and banks came up, IT went down; PSU stocks which were at the bottom of the barrel came up; growth took a back seat, value came back. What will be the construct of the portfolio in 2023?
We have a very different setup right now. If you look at where the market is, we are looking at a much higher interest rate cycle in terms of both lending rates for banks and deposit rates for banks because that has also gone up. We are seeing the RBI saying that we may be closer to the end of the rate hiking cycle, but we are not sure.
The Fed, on the other hand, is saying that they are going to continue to raise rates. Most western economies will continue to raise rates and so we are going to think that at some level, there will be a reversal of this interest rate cycle towards the end of this year. Companies that will succeed this year are probably those that are more traditional in nature may not be the same old companies which were debt-free and high cash flow which are valued at 80 or 90 times earnings might moderate this year.
It is more likely companies with relatively high levels of manageable debt are probably going to succeed in the coming year because generally that is what happens when the interest rate cycle changes. People who are more efficient in terms of being able to generate both ROE and ROCE by using their capital efficiently are the ones that will succeed and in this capital, I include debt capital as well.
We assume over here that while the banking cycle might change to their benefit, the effect will come towards later half of the year but we will see a lot of the traditional manufacturing firms that use relatively high levered balance sheets and instead of zero, 1:1 debt to equity ratio, might succeed in this cycle. Whether it is railways or defence or where there is a lot of capital from the private side and from the public government side.
What is your take regarding metals? Is it something one should invest in or given that it is so volatile and there are so many moving parts, is it better to just stay away?
Metals have gone through a down cycle. They are starting to show some signs of a rise. Even on the charts, there are some stocks that seem to be breaking out whether it is or even JSW.
We have not heard anything on the ground that says this is a massive change in fundamentals but I will wait for results at this point and commentary to see if anything has changed because the only thing that might have changed is the Chinese comeback story but according to me, that is bad for us. It may just be an enthusiastic market rather than something core in the fundamentals. I will wait for the results to come in.
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