Investment, Exit Strategies & the Impending Recession

The much awaited year 2023 is here with a bang on all fronts. India has pushed UK to the 4^th position in World Economy Rankings. China, in spite of being in the second place, still maintains its superiority over the New Coronavirus Variants and is keeping WHO on a constant check to control the Pandemic.

The real global GDP growth in 2023 is estimated to be 2.3%, while experts assign a 65% chance of severe global recession.

Ironically Recession emanates from the word Recess that we have frequented during our School days that brings joys to our mental self as we will be allowed to stay away from classes and have some fun. But in reality “Recess” means a period of time in which an organized activity such as study or work is temporarily stopped or Paused. In contrast Recession is the period of decrease in wealth, industrial production and employment, which in every way may not go well with most of us.

Photo by Engin Akyurt on Pexels.com

Barclays Capital Inc. says 2023 will go down as one of the worst for the world economy in four decades. It may be one of the most anticipated recessions of all time, but that doesn’t mean it will hurt. IMF chief Kristalina Georgieva said that 2023 will be tougher than last year as the US, EU and China see their economies slow while it comes with the backdrop of Ukraine War, rising prices, higher interest rates weigh on the global economy.

As the federal reserve ramps up its most aggressive tightening campaign in decades, the consensus view is that a recession, even though a mild one will hit globally.

We are in for much clearer picture as to the impending recession with a well narrated news item by “The Epoch Times “that reads “2023 spells Big trouble for US Economy, Majority of Large Banks warn “The vast majority of economists at 23 large financial institutions surveyed by the Wall Street Journal predict that the US will fall into the grips of a recession in 2023 and that millions of Americans will lose their jobs. More than two thirds of the nearly two dozen institutions which include trading firms and investment banks that do business directly with the federal reserve, expect the US economy to contract in 2023, according to the Report. While this is the case with the situation in the US, still some of the experts feel that the United States will manage to avoid a downturn as has happened in 2008.

The Editors of the Collins English Dictionary have declared “permacrisis” to be their word of the year for 2022.Defined as “an extended period of instability and insecurity”, it is an ugly portmanteau that accurately encapsulates today’s world as 2023 dawns.

With so much uncertainty about the new year, a cautious outlook seems prudent. Long-term trends and investing norms are shifting. Investors must watch carefully for sector changes and make smart stock picks.

Some analysts see value stocks outpacing growth stocks, as big tech stocks continue to seek new footing. Other expert’s 2023 stock market predictions call for strength in infrastructure stocks and opportunities to profit from mergers and acquisitions

Photo by Nataliya Vaitkevich on Pexels.com

On a recapitulation of how the market fared in 2022, Investors suffered a beat down, with all three major indexes, The Dow Jones Industrial Average down by 8.8%,  the tech-heavy Nasdaq endured an ugly fall of more than 33% and the S & P 500 sank 19.5%,  making their biggest declines since the 2008 financial crisis. The year was even more challenging for growth stock investors. This was evident from the innovator IBD Stock market outlook, who has switched from confirmed uptrend to uptrend under pressure and to correction several times in 2022.

Asian Stock Markets too came down on 2^nd Jan’2023, extending losses from the previous week as concerns over rising interest rates and a potential recession in 2023 weighed on sentiment, with uncertainty over China’s economic reopening denting regional markets.

Indian banks may have weathered the pandemic with high capital buffers and improved asset quality, but going forward, they face a highly uncertain outlook, the RBI said in a report dt.3 jan’23. “With global growth set to deteriorate in 2022 and with rising prospects of a recession in 2023, credit growth could procyclically decelerate across major economies which, in turn could shrink bank profitability” the report added. On a similar note RBI pegs GDP growth at 6.8% for FY23, projects inflation to fall below 6% by March’23. Shakthikantha Das, RBI governor further added that despite the downward revision in the economic growth projection, India will remain among the fastest growing major economies in the world in 2023.                                                                                                            

Indian equities outperformed other global markets in 2022, largely due to the fact that Indian economy is placed in a much better shape amongst the global economies. Unlike other developed markets, recession is not yet on the horizon in India and inflation too is under control for now. Most of the top broking firms expect this trend to continue during 2023 but same time does not expect big positive slides. Almost all of them considers Banking, Consumer staples and Auto Sector to make big strides while Telecom, Industrials, Energy and Utilities to remain neutral at least during the first half of 2023. Nomura predicts Nifty at 19, 030 in 2023 and expects medium term growth in earnings from a high margin base to be largely dependent on broader economic growth. Motilal Oswal expects two themes to play out for the Calendar Year 2023 namely Credit Growth and CAPEX.

In effect we can expect better growth for ICICI Bank, HDFC, SBI, Axis Bank, Infosys, HUL, L&T & Bharti Airtel, while Zydus, Medplus, TCS, IGL & RIL to remain Neutral and Stocks like M & M, Honeywell, Info Edge and DMart are rated to underperform.                                      

From an Investor’s point of view, we normally look at the past 12 months and count on the number of errors and corrections made and the possibility of happy tidings in the current year. In other words, we are bound to fine tune our investment strategies and closely follow the market in terms of fresh investments or the when to exit without any losses.

To sum up, year 2022 had an interesting volatile journey, from sticky inflation forcing us to tighten our spending habits, to the ongoing geopolitical tension that triggered a surge in crude oil and petroleum prices as also to a deluge of rate hikes by RBI. Despite a variety of downers assaulting the market, 2022 has also provided number of demat or retail broking accounts which touched an elusive 10.5 crore accounts, indicating the sustained appetite for equity investments.

Photo by Burak The Weekender on Pexels.com

As we look at 2023, the stock market may have to follow the volatile trend as seen in 2022 as the market tracks the US Fed closely. FMCG Companies, Pharma and Hospitality sector are expected to do well as also the BFSI sector due to strong revival in credit demand, higher interest rates and lower provisioning costs. Companies with strong fundamentals are expected to remain primed for growth. Investors who are patiently stay invested for at least two to three years are likely to have good returns.                                                               

In an interesting Economic times report we understand that “as the monetary policy regime moves from Quantitative Easing –easy money supply – to its opposite – Quantitative Tightening, making quick money from stocks will likely become challenging. In effect this will be a first for many investors who joined the rush into equities in recent years and for whom ‘buy-on-dips’ was a sure shot strategy to make money in the market.                  

Three Key Factors that determines best investment strategy to consider

• Risk Tolerance or the amount of risk that we are willing to take prior to an investment. Generally, investors catching up higher risks should be rewarded with higher returns. Many investors are often attracted to high returns on their investments. However, when markets get volatile, and see a sudden dent in their portfolio’s value, they get shaken and unable to stick to their plans and end up panic selling and crystallizing huge losses on their portfolio.
• Expected Returns on our investment as we are contemplating a certain amount of returns at a specific time period to achieve our financial goals. This expects us to do some simple arithmetic calculations, by back testing our investment using historical prices and calculating the annualized returns.
• Effort required to implement the strategy – the third factor is the amount of effort that we are ready to commit ourselves to successfully implement the investment.

When it comes to Exit from an Investment, it does not necessarily mean to exit and utilize the capital towards non-investment plans, but also include to exit from a more volatile fund and reinvest in a less volatile or high return investments.