'Well-Owned Themes' May Not Play Out In 2023, Says Demeter Advisors' Ashwini Agarwal

As interest rates and the growth outlook normalises in 2023, ownership trends will be crucial and "well-owned themes" may not churn out good returns this year, according to Ashwini Agarwal, founder of Demeter Advisors LLP.

In terms of domestic investment, this year will see greater allocation to fixed income, Agarwal told BQ Prime. There is going to be a limited amount of money, and stocks that are "well-owned" will struggle to find new buyers in this kind of environment, he said.

"I don't think it is going to be a massive positive inflow year for foreign investors, given India's punchy valuations and as the world normalises."

According to him, investors should look for ideas that haven't already attracted significant investment. This could be a significant determinant of alpha generation, he said.

In 2023, the alpha would come from a combination of fixed income as well as bottom-up stock picking, according to Agarwal.

Where the equity market is concerned, a bottom-up stock-picking approach will create the alpha, he said.

Returning to normal in the Indian context includes increasing the fixed income allocation, Agarwal said.

"I would say alpha generation or return generation would be a combination of fixed income, which actually has a negative flow effect on the equity markets for domestic investors, as well as bottom-up stock picking," Agarwal said.

According to him, it is going to be a "hard grind" to generate returns, but it is a great endeavour if an investor is looking for ideas and opportunities.

According to Agarwal, financials is one area where there is value because credit costs have not bottomed out yet.

"Credit costs are going to be a lot lower than what is pencilled in, which gives headroom for earnings surprises."

There might be opportunities in the NBFC, housing finance, and PSU banking spaces, Agarwal said.

He also finds value in small and mid-cap stocks, against the backdrop of cost-normalisation-led margin recovery.

"In the small, mid-cap space, there are a lot of companies out there, and hopefully, they will see much better raw material and input cost equations as compared to what it suffered in the last three years."

Agarwal said there are interesting opportunities in building materials and construction ancillary products, as the sector hasn't seen much activity in the last decade.

The boom in this theme may last three to five years, he said.

However, Agarwal is not a "huge fan" of the cement industry, as the consolidation in the industry is not adequate enough to ensure pricing discipline, he said.

Agarwal expects interest rates to start leveling off in one or two months. There will be no more steep increases from here for the rest of the year after the first quarter is underway, he said.

The second normalisation he hopes to see is on the China front. "I am hoping China will come to normal, both as a supplier of products that everybody in the world needs as well as a driver of consumption globally."

Agarwal also expects energy prices to normalise in the year, supported by a warmer-than-expected winter season and a lull in the Russia-Ukraine war in the medium term.

Shortage-led prices and software demand will play a role in moderating the effects of input inflation, he said.

"The shortages will have some positive impact on China opening up as well as software demand coming through both in the U.S. and Europe."

However, there is some fear that base materials like steel and aluminum might see some increase with China getting back on track, he said.