Stock Market 2022 | Sridhar Sivaram: 2022 is tough but India will do extremely well 2023 onwards: Sridhar Sivaram

“The MSCI Emerging Market index has not done anything for the last 10-15 years, People will start looking country specific because for the same period, India has done 7-8% dollar returns. The realization that India has compounded over a period will come ,” says Sridhar SivaramInvestment Director, Enam Holdings

Look at the index. We are down just 1% for the year in a year where whatever could go wrong has gone wrong – be it war, inflation, rate hike by central bankers and the market is almost flat?
In the emerging market context, India is a star. Look at MSCI – Korea, Taiwan, China all are down 25%, the emerging market index is down 20%. India is down 6-7% broadly.

Absolute is approximately 1%…
So you look at India and you think wow we are stars! Honestly, a large part of the FII selling that we are seeing, in my view, is collateral damage caused by emerging markets going through a crisis. If you look at the MSCI Emerging Market Index for the last 15 years, they are flat, they have done nothing.

My view is that this asset class is literally dead as the index has not done anything for 15 years. Look at the composition of the index. There are current account surplus countries, current account deficit countries, commodity exporting countries, commodity importing countries; there is a country with per capita of $25000 and a country with $2,000 per capita, So the sum of parts is zero. Some countries are benefiting, some are losing and so if the index has not done anything for you 10-15 years, I think people will start looking at country specific because for the same period, India has done 7-8% dollar returns. The realization that India has compounded over a period will come.

Most of my friends who manage emerging markets say that clients are now demanding emerging markets or Asia ex-China, because nobody wants to invest in China now. Eventually, India’s weight in the emerging markets will continue to go up as the pressure to perform for these indices goes up. So within the overall scheme of things, India is looking very good. The prospects for the next year are looking even better so we are quite bullish.

Will we only relatively look better or do we have a strong case for outperformance on a standalone basis?
I think 2022 is a tough year and we are seeing that. The index does not show the pain that is in the portfolios. If one looks at the performance of the index and takes the top 10 or 15, they are mostly value stocks. You have the likes of

and have some of these auto names and thrown in, which nobody wanted to touch a year back.

Six months back.
So the composition of the returns tells us that there is a flight from growth to value. That is something we have been playing. Fortunately, we have been on the right side but not on all the stocks. Some values ​​have also got crushed, but broadly that is what we are seeing right now. We think growth will now slowly come back as we are seeing the economy stabilize. We are seeing better tax collections, consumption numbers are showing an uptick and we think growth will come back and there will be a shift back from value to growth.

We are possibly in that transition phase where growth stocks may start to inch their way back into the markets, specifically the ones where earnings are at least visible. Where earnings are not visible, we standalone also do extremely well, at least from 2023 onwards. In 2022, we still have a lot of challenges, too many rate hikes are expected, inflation is yet to stabilize and we do not know what is happening in Ukraine. So we may see this up-down that we are seeing right now in the market. We may see a little more of that but the base is getting set for 2023.

But will growth replace value or will both of them coexist at the top?

It is a very tough question to answer but we are seeing growth coming back in value stocks like PSU banks because their provisioning numbers are going down substantially. From say 2-2.5%, provisioning now may be under 1%. So, we will see profit growth there. Would you call that growth or value is a big question mark. I think the traditional growth companies could come back, value where you are seeing earnings momentum may continue to do well. It will be a challenge for stock pickers but if you can manage the environment, there is enough money to be made.

The dividend yield of is 4%. So where is IT? 10-12% is growth or 4% dividend yield is value.
So I would say IT is in that space where they mimic what happens to US growth and the other thing is the big myth that currency depreciation helps them. Look at ITC or any of the top five performers over the last five years. The currency has roughly depreciated 20-25% and their margins are down 2%. So basically they have no pricing power and to some extent, they are also commoditised.

They may say as much as they want that they are digital, they are high end but end of the day, there is a part which is high end and there is a large part which is really the low end work that they do. Those tend to do well when the US economy is doing well, when discretionary spending especially for technology is very high.

In a recessionary environment we are already seeing sound bites from the likes of Google and Amazon that they are cutting the workforce. So I think the next one year will be tough for them and it may fall into the value zone, but currently their PEs are more on the growth zone. So, there could be some more derating there. I could be completely wrong.

Where is the commodity cycle headed? Is it time to say goodbye to metal stocks now?
So we have split views in our house. I was of the opinion that crude and non-ferrous will do extremely well and there are others in the group who felt this is time to exit. Now crude is successful but non-ferrous is collapsed. Investments in this segment have come off almost 50%.

They have been zero.
Yes so at least in crude, it takes about four-five years after you start investing and if the investments are low, it takes a much longer time for it to come back. So even before the Ukraine war, sometime in September, crude was around $80-85. It is not as if we were at the $50 mark. So there was already a pressure on oil. I think it will continue because investments have been very low. We will see a period where crude will be in the $80-100 range for a sustained period until we enter this transition into green versus fossil fuel.

My view on non-ferrous was also the same and it is the same – investments have been very poor and in this cycle, most companies have not announced massive capex, barring one company.

You are talking about
Yes but even that is more for their overseas entity…

You are talking about Novelis…
Yes so most companies have distributed cash unlike in the previous era where as soon as commodity prices went up, massive capex happened and then there was a period of excess supply. As economies come back and that may take some time because there is a possibility of recession both in the US and in China, even at these prices, they will still make a lot of money but for the stocks to get rerated again, it may take some time.

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