You said 2023 is going to be the year for mid and smallcap stocks so just let us delve further, let us understand what are some of the themes, would you like to share some stocks as well that you would look at for the new year?
As a theme, mid and smallcap has plethora of options; one might have a turbine company, one might have companies that are doing ethanol among mid and smallcaps. It is more about bottoms up, it is not so much about the trend because the trend normally forms in the large and the midcap space.
In smallcaps, it is about individual stock picking. It looks cliché but if you really want to play a theme or a small theme or a subset of a theme where you are okay to lose a little bit of temporary money but for the long run, want to make it big, smallcap and midcap IT should do well.
It has been about 12 or maybe 15 months of struggle for these IT companies and they have not gone down on profits. You might have assumed that they will grow at 20%, they grew at 15% or 16% or 17% or 14% or 13% but most of these are down 40-50% from the top and stocks normally do not fall more than 60-70% unless there is a survivorship crisis in the company.
But they are already down 40-50%. If these companies deliver earnings even at 15% or 20%, one would see the all-time highs come back again after one, one-and-a-half years. So in one, one-and-a-half years, many of these smaller companies would have been beaten down even while their earnings have gone up. Our expectations would have been different and the actual delivery would be different. Many of these stocks could double over the next 12 to 15 months.
One cannot ignore the looming fears of recession next year. Covid is making a comeback, there is going to be an election event down the line. What could be some of the big risks for the Indian equity markets going into the next year?
This is the much awaited, much talked about, much discussed, much analysed and much researched recession America would have ever had, over the last three, four, five decades. It is like shouting tiger. One day the tiger will come and nobody will care a damn. So many say, America is already in a recession. Many say a recession is coming but it is just about spending the next two, three months on the pitch. If you play 10-15 overs, the runs will come and so you have to survive. We have all survived the last so many months, assuming that the companies would deliver earnings.
Even if recession comes, it is all in the price. You would see how the Nasdaq and how the smallcaps move. The midcaps have already come up. Most of the midcaps are nearing all-time highs. It is just about the smallcaps in India and the largecaps are telling us that the Indian market is different but the Indian market is different not because of the earnings potential but because of the local money that is flowing in and they have actually helped to save the markets this time.
So even if a recession comes, it is already there in the price. Also, it will go away. America is not Japan, America cannot be in recession for 20 years, Japan was in recession for 20-30 years. So if it comes, it goes away, you have to look at it like this. We have to look at recession as a part of life, it is not life and death, it is just part of life.
There is a lot of talk about recession. But as you said, 10-year yields are not coming down. What sort of an impact will that have? We have seen unprecedented rate hikes. Of course, the market has already tried to price it in but it definitely will have an impact next year?
If you want a real quick reaction from the Fed and a big rally, hope and do not pray that one of the big banks go belly up. They will come down overnight and there will be a 100 bps cut. Otherwise, the 10-year right now is discounting what the Fed will do.
Over the next three, four months, the Fed is saying higher for longer, higher for longer but they also said that the inflation is transitionary, at 7% mortgage rates Americans just cannot buy a house, it is just out of the window. So the moment you have a slowdown like yesterday the Dow and Nasdaq went up because the jobs report was bad. We are in a situation where bad news is good and good news is bad. The earlier economic data comes, the better is it for the markets because then the Fed would be forced to get the interest rates down.
But the 10-year is not coming down and you have had seven rate hikes this year. It is just a matter of time, wait two, three, four months on the crease, play the ball and then you see how it happens.
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