For equities, 2023 to be a volatile year: Kotak MF

Kotak MF has suggested staying marginally overweight on large caps and marginal underweight on small and mid-caps. 

From a valuation point, Indian equity markets are trading at a marginal premium to the historical average. As per the fund house, the average historical price to equity (P/E) ratio is 18.5 times and markets are trading at about 20 times. 

The price to book historically is about 2.6 currently and markets are at about 3.2. As far as market capital to GDP ratio is concerned, it is at a reasonable premium to long-term average, as per fund managers of Kotak MF.

Historically, Indian equities have traded at a premium to emerging markets but as of now the premium of Indian equities over other emerging markets is almost high at 139%, as per the fund house. This is partly because of the massive outperformance of Indian markets over emerging market peers. 

As domestic market performances improved, the weight in MSCI Emerging Market has also increased to 14.8 % in November 2022 from 7% in 2020.

Indian economy is in also a better shape compared to the world economy, observed the fund managers and the West is going through tough days. 

Technology companies have had to resort to massive layoffs, credit card debt has been rising, and is 15% to almost a trillion dollars, small businesses are unable to pay rents, cryptocurrencies have had a setback and crypto exchanges are failing. Business owners world over are largely bracing for a recession.

All this would likely have an impact on global equity markets.

The US Federal Reserve has been raising interest rates at a fast pace but the tightening has not had any significant impact on inflation. The Federal Reserve injected $4.8 trillion through the US sub-prime crisis to the covid pandemic, but has only withdrawn $400 billion, said Nilesh Shah, managing director, Kotak Mahindra Asset Management Company, adding that more money needs to taken out of the system.

The fund house expects interest rates to peak in the first quarter 2023 and expects rate cuts starting in the fourth quarter of calendar year 2023.

In the US, corporate profitability has surprisingly been quite solid, as per the fund managers. Companies have been transferring increased costs of inflation to their customers, thus protecting their profits. However, during this period, the US government has continued with its economic aid, which in turn has led to ballooning of public debt. As a result, the yield curve measuring the gap between yields on two- and 10-year US Treasury notes have remained inverted, in a sign of possible recession.