Equity, gold or fixed deposit: Which asset class to deliver maximum return this year

Gold prices have surged more than 17 per cent since January 2022, while the domestic equity market stood almost flat during the same period. A couple of factors including the Russia-Ukraine war, sustained outflows by foreign institutional investors and an increase in repo rate weighed market sentiment on Dalal Street. At the same time, fixed deposits hogged the limelight with rising interest rates. In an interaction with Business Today, Madanagopal Ramu, Fund Manager and Head-Equity, Sundaram Alternate Assets shares his insights on various asset classes. Excerpts:

BT: Benchmark equity index BSE Sensex has advanced just 2.5 per cent since the start of 2022. How do you see the trend going ahead?

Madanagopal Ramu: Markets can remain volatile during the first half of 2023, but we don’t see much downside from current levels for the year. So far, globally as well as in India, inflation’s impact on growth is much lesser than feared. We are now nearing the end of a high inflation cycle and expect inflation and interest rates to reverse in the second half of 2023. Markets therefore can regain in the second half of 2023, even if there will be a moderate correction in H1 2023. One should remember that markets have now consolidated at current levels for almost 16 months, and earnings have grown in low double digits, therefore another six months of consolidation would be observed and as we look into FY25 earnings, a lot of stocks will start looking attractive for long-term investors.

BT: Which factors do you think would add some spark to the dull market?

Madanagopal Ramu: Lower inflation numbers, better job growth data and most importantly no negative news on supply-side shocks can be very helpful.

BT: Which sectors do you think may deliver a solid return to investors by 2025? Why?

Madanagopal Ramu: We are likely to see macros making a complete U-turn from high inflation to low inflation in a year’s time. So, sectors which did well in a high inflation cycle and the ones which will do well in low inflation can be dramatically different. We believe growth cyclical like consumer discretionary, financials, auto and e-commerce sectors are sectors to bet in a low or stable inflation cycle. Most of these sectors underperformed last year despite reasonable earnings growth, due to fear of inflation. A reversal is possible is 2023. Defensive, low price-to-earnings, low growth stocks were preferred in 2022 and in 2023, at least in the second half, we can expect growth cyclical stocks to make a comeback.

BT: Both gold and fixed deposits outperformed equities in the past 14 months. Do you think investors can further increase their weightage in gold and FDs?

Madanagopal Ramu: A year back this idea could have been better, but now with the high inflation cycle nearing its end, investors would be better half staying invested in equities. We never recommend a switch in and switch out from equities to debt for short-term cyclical factors like Inflation. There are lots of chances that you might miss the initial rally because markets will factor macro changes much before they show on real data. In the long term, equities are always the best asset class to create higher returns to beat long-term inflation. Debt, even in the best case will just manage to compensate for inflation only for a short period. When it comes to gold from an investment perspective, it’s always better to invest in the largest jewellery retail chain operator in India than invest in gold, because the returns are very impressive in the last five years compared to gold. You get the benefit of both gold prices through higher profitability per gram and volume growth due to market share gain.

BT: BSE IT index emerged as an outperformer of 2023 so far. What is your advice to investors who want to bet on IT stocks?

Madanagopal Ramu: The IT sector seems to have so far not been impacted by the developed market recession or growth slowdown. But the next two quarters can still have some impact from a deal flow perspective and eventually, an impact on growth for 2023. Stocks have already seen a rally, so there is not too much value left on the table. We would rather focus on selective domestic tech platforms, if they continue the growth and turn profitable in the next one year, then some of them can become attractive from a value perspective.

BT: What are your key takeaways from Q3 results? 
Madanagopal Ramu:
Financials, auto, industrials and IT delivered better than expected numbers. Metals and materials disappointed. In consumer discretionary the results were mixed, there were a few surprises despite high inflation due to sustainable urban consumption. Staples’ results were weak due to weak rural demand. Capital goods positively surprised on margins, but order inflow was disappointing across the board. Commentaries by most of the management was cautiously optimistic.

 

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