Maneesh Dangi Suggests Alternatives To Indian Stocks In 2023

India's growth is expected to slow down and liquidity will tighten in 2023, given factors such as uncertainty over China's reopening, global inflation and a potential recession, according to Maneesh Dangi, founder of Macro Mosaic Investing and Research.

Therefore, investors can pick bonds over equity, and even look beyond the Indian stock market altogether to U.S. equities, Dangi told BQ Prime's Niraj Shah.

Taking India’s historic valuations in account, Dangi said the country is currently trading at 19 or 19.5 times its earnings compared with 18 times before the Covid-19 pandemic. "India is neither obscenely expensive, nor is it cheap at the same time."  

On the other hand, the U.S. stock market has seen higher earnings growth compared to India, especially in the decade from 2010, which makes it "attractively placed". Moreover, U.S. equity is relatively cheaper, but U.S. bonds are even more inexpensive as they can provide 2% real returns, he said.

Even in India, equities relative to bonds deliver around 3% risk premium. Markets are not exorbitantly expensive but risk premium is relatively low, he said. "Investors who are spoilt for (equity) risk premia of 5-7% over 10-20 years against bonds, will be disappointed."

Dangi currently recommends U.S. bonds, followed by U.S. equities, Indian three-year accrual bonds, and then the Indian Nifty.  

From a structural standpoint, a large section of foreign direct investment comes from people in the age group of 45-65 years in the developed markets, Dangi said.

As population has peaked, that group will shrink in terms of size. Net flows to India and other emerging markets "will be trickling only", he said. This will eventually make FII contribution to India’s market an insignificant force compared to the present.

Dangi said that foreign flows could eventually go back to the U.S., rather than to emerging markets. 

"It's important to keep in mind that India’s liquidity dry-up has been one of the fastest in the world. What Fed is trying to achieve at a peak liquidity withdrawal level, India has already accomplished because of large current account and BoP deficit, which drew down our reserves and dried up INR liquidity in the banking system."

According to him, while rate hikes in both the U.S. and India "would slow down at margin, liquidity will continue to leak and that will continue to put pressure aside from the effects of the past tightening”.

There are signs of a rougher time for the Indian credit system in the coming quarter, he said. 

Small cap balance sheets tend to suffer during liquidity tightening and when access to capital is restricted. "Nominal growth rate clocking about 15-20% is going to halve in the next one year."

Low Inflation is a ‘disaster’ for small caps, he said.

A large part of the money flow into mutual funds has been to small and mid caps. Based on previous patterns, Dangi is concerned that mutual fund flow will slow down, which will cyclically inhibit foreign investors from predominant selling.

In such a situation, he said, high net-worth individuals will retreat because of other opportunities, which will see the overall aggregate flow to small caps dwindle.  

“Once you enter in a weak macro, stay away from small caps. They may give you returns, but net outcome through the cycle will be bad for you," Dangi said. "If you want to be in equity, hide yourself in large caps only."