Annual Outlook 2023.pdf

2023 - A Phoenix Year
Commentaries from fund managers across different asset classes to give you
a complete picture of how to play the year ahead.
Introduction
Asweenterthenewyear,allﬁngersarecrossed.2022hasbeenavolatileyear,oneeventfollowedbyanotherwithmanyrepercussions.
All these lead to global economic slowdown. It has been a year of surprise, shock, fear but yet has given a great opportunity to invest in
dipofmarket.
2022 – Breakdowns & Build-ups
2023 - A Phoenix Year 01
Source: NSE, Morgan Stanley research, data as of 21st Dec 2022.
2022 In Charts
Equity/bondcorrelationshaveturnedmorepositive,meaningbondsareprovidinglessofahedgetoequities.
Source: Haver Analytics, Datastream, Goldman Sachs Global Investment Research. Data as of 22nd Dec 2022.
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
1-year correlation 10-year correlation
US
taper
tantrum
COVID-19
crisis
-20 and below -20 to 0 0 to +20
in percent
20 to 40 40 to 50 50 and above
2008
2011
1995
2000
2001
1998
1987
2015
1986
2016
2002
1982
2018
1983
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2013
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2014
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2022
2004
2019
2020
1989
1994
2021
2010
Indiahasrelativelydonebetterthanothereconomiesduetothesigniﬁcantchangeineconomicstructure.

PremiumforIndiahasincreasedovertheyearsinallaccountsonbackofimprovedROE.
2022 2021 2020
ValuationsataGlance
India EM Premium India EM Relative India EM Relative
24.7 12.3 2.0 26.9 14.0 1.9 36.7 21.7 1.7
PE
23.0 12.2 1.9 23.0 12.4 1.9 23.3 14.9 1.6
FwdPE
3.6 1.6 2.2 3.8 1.9 2.0 3.3 2.0 1.6
PB
1.3% 3.4% -2.1% 1.0% 2.4% -1.3% 1.0% 2.0% -1.0%
DivYield
14.4% 12.9% 1.5% 14.2% 13.4% 0.8% 8.9% 9.2% -0.3%
ROE
Source:AxisMFResearch,GS. Pastperformancemayormaynotbesustainedinthefuture.
Equity Markets in India
Source: Axis AMC Research, News Reports. Data as of 21st December 2022.
Equity markets this year saw a roller coaster ride driven by global tailwinds and rising favour for the India growth story. Amidst
turbulenceintherestoftheEMbasket,Indiastoodoutasafavoureddestinationforglobalinvestors.
Domestic Flow support
Source: Bloomberg, NSDL, BSE website, I-Sec Research
Domestic flows worked as saviour from outflows of foreign investors which kept the equity market resilient. FPI flows continued to be
relatively stable even after the hawkish stance. The flows have been driven by domestic economy sectors such as financials, consumer
discretionary,industrials,FMCG,healthcareandtelecom.However,sectorsdrivenbyglobalfactorssuchasenergyandITweresoldby
FPIs.
15,000
15,500
16,000
16,500
17,000
17,500
18,000
18,500
19,000
Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22
NIFTY & Newsflow
Gov. imposes windfall
tax imposed on
Oil producers
Economic survey, F23
Budget tabled by
Finance Minister in
the parliament
Russia Ukraine
crisis escalates with
Russia attacking Ukraine
RBI hikes repo
rate by 50 bps to 4.9%
New Government
formed in Maharashtra
New ODI
regulations: Govt
allows investment
in financial
services abroad
RBI Forex Reserves
at lowest level
in over 2 years
INR/USD
at 83, all
time high
RBI hikes policy
rates by 35 bps
to 6.25%
Crude oil prices Surge
to $130/bbl amid
Intensifying
Russia-Ukraine war
US Fed approves
0.25% hike
Food CPI accelerated
to 8.6% YoY in Sep
from 7.6% in Aug,
highest since Dec-2020

Gratus Maximus India
Source: Bloomberg, Citi Research
Markets have had a wild ride this year and likely to end at square one. We witnessed some serious ‘airtime’ (Ref rollercoasters) as
investors who up until last year were comfortably coasting one way UP! As the world faces many challenges they have experienced a
rollercoasterinvestmentrideandtestedpatienceofmany.
- By Jinesh Gopani - Head Equity – Axis Mutual Fund
Valuation
India’sabsoluteandrelativevaluationsremainnearmulti-yearhighs.NIFTYEPSgrowthexpectationsstandat13%/13%forFY23Eand
14%/17%forFY24Erespectively.Onayieldgapbasis,themarketlooksstretchedonvaluations.
NIFTY: 1Y Forward Valuation Bond Yield Gap
Source: CMIE, Morgan Stanley research
Credit Growth
Credit growth story remains strong for India with Loan growth for PSU banks at 15% and Pvt banks at 20%+. Consensus positive on
Banks,morethanNBFCsonconcernsoverrisingdeposit/liabilitycost.creditgrowthistrackingat17.9%asofOctober2022vs.6.8%in
October2021and7.1%pre-pandemic.Further,industrycreditgrowthhasrisento12.6%YoYinSeptember2022,itshighestsinceApril
2014. The growth so far has been driven by Retail and SME loans, which are currently outpacing large-ticket loans, but there could be
some moderation in housing loan growth ahead, given rising rates. Large industries’ loan growth has been improving as well (8% YoY as
of Nov’22 vs 1% in FY22); it is expected to sustain given the rise in industrial capacity utilization and the improvement in outlook for
public&privatecapexrecovery.
Source: CEIC, RBI, Citi Research
Capex Cycle
Public capex in the current ﬁscal year is expected to reach its highest level since FY09, push is likely to continue in the pre-election year
in 2023. Increase in public sector spending augments private sector spending as well. Hence, cash ﬂow generation remained healthy in
FY22andsupportedtheearlyphaseofprivatecapexrecovery.Also,assetturnsinselectsectorsareabovehistoricallevels,whichraises
thechancesofcapex.Private-sectorcapexintentionsareseeingsignsofimprovement-4QMAVofnewprivateprojectannouncements
isatitshighestlevelsince4QFY09.

Source: Budget documents, Citi Research Estimates
Source: CMIE, Citi Research Source: CMIE, Citi Research
Earnings
Earnings expectations for FY23E have started to see downward revisions since 2HCY22 – reversing a trend of upgrades (Oct’20-
Dec’21) and ﬂattish revisions (Jan’22-Jun’22) seen since 2HFY21. Consequently, FY23E EPS is down 4% in 2HCY22 while FY24E EPS
hasalsoseenmarginaldeclines(2%in2HCY22).NIFTYEPSgrewat~12%CAGRoverFY15-23E.
NIFTY Trailing 12M earnings growth trend
NIFTY Earnings Revision Trend

Rural Revival
Source: CMIE, RBI, Company Data, CSO, CEIC, Haver Analytics, Morgan Stanley Research.
From a demand perspective, improvement in rural consumption trends is one of the key factors. We believe rural demand starts to
recover – Urban demand indicators such as passenger vehicle sales growth was largely steady while rural demand indicators such as
twowheelersales,tractor,fertilizersalesandagriculturecreditshowedsomepickup.
Rural Economy Tracker Holds Up
View for 2023
In 2023, we expect growth trends to remain decent. Themes that the markets will look out for include rural recovery, private capex,
sustainabilityofcreditgrowth,globalslowdownimpacts,rates,andinflation.Flowsprovidesupport–resilientdomestic&improvingFII
flows – along with a weaker USD. India’s macroeconomic stability, relatively resilient EPS growth and conducive flow environment
justifyIndia’spremiumvaluations,buttheupsidepotentialappearslimited.
Key Focus Areas for 2023
• Consumption – Rural Recovery: Better winter crop, potential pre-election budgetary support for the rural economy, early green
shootsinruralemployment/wages.Ruralconsumptioncouldbeatrickshot
• Capex Cycle and Credit Growth: Public capex cycle has improved in FY23; we would watch for private capex recovery, given
improving capacity utilization, a favourable policy environment (PLI Schemes + ongoing China+1 strategy), strong corporate b/s
andcashflows,largeindustries’loangrowth.
• Margin Risks: Bottom-up earnings expectations for FY24E are baking in margin expansion as well as decent growth momentum.
RisksaretothedownsidegivenFY24EConsensusNIFTYEPSiswellabovetherecentacross-cyclegrowth.
• Flows and Global Backdrop: USD decline is favourable for EM inflows & India should benefit (especially passive flows – India’s
weightinbenchmarkisatlifehighs).ActiveportfolioscontinuetoremainsignificantlyunderweighttoEMbenchmarkweights.

Source: Style data provided by Bernstein Quant Research
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Longer
term
premium
(Discount)
to
markets
Quality basket Valua ons rela ve to market
Expensive
Cheap
However, this also provides for optimism going forward as the markets cannot continue to disregard for too long stocks that have good
quality/growthfundamentalsandreasonablevaluations.Whenitdoes,wehopetocaptureitbyhavingtherightsetofexposures.
Lastly, the markets as a result of their strong performance on an absolute basis and outperformance on a relative basis are trading at
signiﬁcant premium to longer term averages. While the strong fundamentals may justify these levels today, it still requires close
monitoring.
Quant-ifying The Markets
WhileNiftyis“only”up8%yeartodate(AsofNov30th),ithashadagreatyearcomparedtoitsdevelopinganddevelopedmarketspeers.
Forinstance,NiftyhasoutperformedS&P500by22.50%inlocalcurrencytermsand13.3%inUSDterms.Furtherthisoutperformance
has been quite consistent across months and quarters. However, if we scratch the surface and look at the details this doesn’t look like a
traditionalupmarketenvironment.Largecapoutperformedmid/smallcapandRupeeexperienceddepreciationthoughmuchlessthan
itsemergingmarketpeers.
Further from a style perspective, all front line styles i.e. Growth, Value and quality lagged the markets this year. This meant that
strategies be it Fundamental or Quantitative that relied on these styles also struggled. In fact, what worked this year aside from Large
cap was exposure to stocks that had high Beta or were more volatile. That has also resulted in most frontline styles trading at cheaper
valuationscomparedtotheirrespectivehistory.Forinstance,belowisthechartforthestyleQualityasdeﬁnedbyROICandonecansee
itistradingatdiscounttolongertermaverage.
By Karthik Kumar – Portfolio Manager – Quant Strategies

Terminus? Pivot, please!
1 2
It has been an annus horribilis for bonds. Indian government bonds have returned 3.1% so far this year , placing this year at the bottom
percentile for annual returns since 2005 measured quarterly. For global bonds, though it was the worst year on record. The Bloomberg
AggregateIndexwhichisthebroadestbondbenchmarksisdownover15%yeartodate,whichprettymuchensuresthatthisyearwillbe
theworstyearonrecord(goingbackover30years).
- By R Sivakumar - Head Fixed Income – Axis Mutual Fund
The story of the year has been inflation both here and globally. With inflation has come rate hikes by global central banks. These rate
increasesalsomeanthattheeraofnegativeyieldingdebtisnearitsend.Atitspeak,Bloombergestimatedthatabout$18trillionworth
3
ofbondshadnegativeyields.Thecurrentestimateisunder$700billion .
CentralBank LatestInflationReading Ratehikesin2022inbps
ReserveBankofIndia 5.9% 290
USFederalReserve 7.1% 425
EuropeanCentralBank 10.1% 250
BankofEngland 10.7% 325
4
BankofJapan 3.7% Nil
Dataasof21stDecember2022.Source:Bloomberg,Respectivecentralbanks.
Lookingatthetableabove,Indiaisnotdoingtoobadlyontheinflationfront.Indeed,sinceSeptember2021,Indianinflationprintshave
beenbelowtheUSinflation.Anastoundingstateofaffairs.
The developed world is grappling with inflation rates not seen in four decades taking most economists and the market by surprise. This
has been led by a general rise in commodity prices from the 2020 lows exacerbated by the Russian invasion of Ukraine in February. In
addition, governments have provided pandemic related stimulus, which to a large extent were monetized by the respective central
banks (including in India). However, even a perfect foresight on inflation and the global bond rout would barely have helped if one was
investingthisyear:
Asset Rationale YTD
Performance (US$)
Equity (MSCI World) Inverse correlation to bonds, nominal asset (i.e. revenues gain with inflation) -19.2%
TIPS (0-5 year treasury inflation Inflation linked returns -2.5%
protected securities)
REIT (MSCI Reit) Real assets should appreciate with inflation -27.1%
Gold Traditional inflation hedge -0.7%
Source: Bloomberg, MSCI, Axis MF Research. Data as of 21st December 2022. Past performance may or may not be sustained in the future.
Itisremarkablethatnothingseemstohaveworked.Goldisclosetobreakingeventhankstoalaterally,thoughitisstilldownnearly5%
sincejustbeforetheRussianinvasion.Eveninflationprotectedsecuritiesaredown.Amazingly,longdatedinflationprotectedsecurities
aredownnearly30%prettymuchin-linewithperformanceofnominallongdurationtreasuries.
1
AsIwritethisnoteon21stDecember,IamremindedoftheuseofthisphrasebyKofiAnnan,thentheUNSecretaryGeneralon21stDecember2004,justfivedaysbeforetheIndianOcean
Tsunami.Hopefullythisreferencedoesnotpresagesomesimilardisaster.
2
UsingCCILBroadTotalReturnIndextorepresentperformance.Letushopethatpastperformanceisnotindicativeoffuturereturns.
3
Iamconvincedthathistorywilljudgetheabominationthatisnegativeinterestratesasoneoftheworstinnovationsinfinance.
4
Thoughincreasingthebandfor10-yearyieldupwardby25bps

That,then,isthebadnews.Whatliesaheadin2023?
Firstly,centralbanksaregettingseriousaboutinflationandarethuslikelytocontrolinflation.Thecumulativeincreasesof200-300bps
in policy rates now imply real positive rates, i.e. policy rates higher than projected inflation. In such a situation it is likely that inflation
stopsrisingand,overtime,beginstodecline.Whileitiswrongtoassumeanimminentendtoinflation,itisreasonabletoexpectinflation
toreturntotargetinthecomingtwoyears.
As central banks get comfortable with the trajectory of inflation, they will pause raising rates – and eventually begin cutting rates.
Where they pause (the so-called terminal rate) and when they cut (pivot) then become the new talking points for the market. While
there have been many calls on a Fed pivot, it is wise to remember that having been burnt by inflation, central banks are going to be very
conservativeinturningpolicyaround.ThisisgoingtoapplytotheRBIasitdoestodevelopedcountrycentralbanks.
Inthemeantime,enjoythefactthatbondyieldsareexpectedtobeaboveinflation.
5
Segment Yields RBIprojectionofinflationJunetoSep2023
1-yearT-bills 6.9%
1-yearCD 7.6%
5-yearG-Sec 7.2% 5.0 - 5.4%
10-yerG-Sec 7.3%
5-yearAAA 7.5%
Source:Bloomberg,FBIL,RBI,AxisMFResearch.Dataasof21stDecember2022
As may be seen, across a range of instruments, the yields are clustered around 7.25%. Unless we expect significant capital gains from
fallingyieldsitmakessensetogoforcarry.Thesegmentonechoosesdependsontheholdingperiod.
What determines the direction of rates from here on and consequently performance of bonds? To be sure the most important factor is
going to be the trajectory of inflation. We do expect that the worst of inflation is behind us, although it is premature to believe that the
worldreturnstotargetinflationintheverynearterm.
Growth is not on central banks’ agenda. But the market expects a recession in the US. If there is a significant recession, that will change
theexpectedinflationtrajectoryandbringforwardapivot.Ashallowrecessionwillkeeprateshigherforlonger.Globalgrowthoutlook
is also dependent on China opening up after nearly three years under rolling lockdowns. Chinese demand for commodities poses a risk
forpricesbutsupplychainissuescouldgetresolvedsothatthenetimpactisbenign.
A continuing risk for Indian bonds is the fiscal trajectory. The budget is expected to bring about some consolidation. But a large
borrowingprogrammeintheabsenceofRBIsupportcanbechallengingforthebondmarket.
Over the past few years, there has been a large deterioration in the fiscal position of the centre and the states. Both the central
6
governmentandcombinedgeneralgovernmentdeficitsareatornearrecordhighs(datagoingbacktoFY1981 )asapercentageofGDP.
5
Source:FBILandBloomberg
6
Source:RBI
What is interesting is that despite the pandemic, tax revenues have held up, and the rise in deficit is largely attributable to increased
spending.TaxesasapercentageofGDPdroppedduringthepandemicby140basispoints,whiledeficitsrose747basispoints(FY19to
FY21.Theriseindeficitis457basispointsfromFY19toFY23usingbudgetestimates).
0
500000
1000000
1500000
2000000
2500000
3000000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Fiscal Deficit (` cr.)
Central Deficit Combined Deficit
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Fiscal Deficit (% of GDP)
Central Deficit (% of GDP) Combined Deficit (% of GDP)
FRBM Target

Highfiscaldeficitsgiverisetomultiplefears:
• Twin deficits: high fiscal deficits are often accompanied by high current account deficits. Potentially this can lead to currency
depreciation.
• Inflation:especiallyasdeficitsaremonetizedbythecentralbankthroughmoneycreation.
• Drag on growth: through crowding out of private sector. At over 10% of GDP, gross combined fiscal deficit is about equal to the
grosshouseholdfinancialsavings.
The impact of fiscal health on growth, inflation and currency means that we should pay a lot of attention to the budget announcements
regardingtodeficitsbothintheyearaheadandtheexpectedtrajectoryforthefollowingyears.
We should expect some consolidation in the deficit. The two periods of consolidation we have seen in central fiscal deficit (% of GDP)
afterthepassageoftheFRBMAct(2003to2008and2012to2017,seerightsidechartabove)haveoccurredthroughanincreaseinthe
nominal GDP rather than an actual reduction in the deficit. Even currently, with nominal GDP expanding in double digits thanks to high
inflation, the centre’s fiscal deficit can fall from 6.4% to 5.8% assuming a similar nominal growth as assumed for the current year. This is
still too high to sustainably reduce growth and inflation risks. A real positive could be a genuine fiscal consolidation that brings deficit
below5.5%.
IfIcansummarizeourthoughtstherefore:
• Theworstofinflationappearstobebehindus.
• Centralbanks,includingRBI,arenearingtheendoftheratehikecycle.
• Realpositiveratesfrombondsprovidegoodvalueforinvestors.
• Risksremainonglobal,growthandfiscalfronts,butappeartobemoderatecomparedtothepastfewyears.
Overallwedoexpect(andhope)forarelativelyuneventfulyearahead.Afterthreeyearsmarkedbyapandemic,awar,andratehikes;we
deservethat.
OnbehalfofthefixedincometeamatAxisMF,Iextendtoyouourseason’sgreetingsandwishyouahappynewyear.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Tax Revenue (% of GDP)
Tax Receipts (% of GDP)

Global and thematic equities – Light at end of the tunnel
StartingwithawarinEurope,2022wasayearmostinvestorswouldratherforget.
Putin’sinvasionofUkraineledtomassivespikesinenergyandfoodcostsatatimewhenpost-pandemicsupply-chainbottleneckswere
already putting substantial pressure on global prices. Central bankers, mostly with mandates to manage inflation, were faced with the
veryrealprospectofarampantcost-pricespiral.
Unusually,theyalsofacedtheunenviabletaskoftryingtoreininwagegrowthexpectationsatatimewhenunemploymentinmostmajor
economieswasatextremelylowlevels.Thescopeforerrorwas,andstillis,great.
Despitemarketfears,wearen’theadingbacktothe1970s
At the time of writing, headline inflation rates in many countries are still high or increasing. There are legitimate fears that central bank
actions may not be sufficient to counter rising wage demands and there is talk of a return to the stagflation (stagnant growth/high
inflation)ofthe1970s.
However,althoughthepriceshockof2022issomewhatcomparabletothatera,itisnotablethatunderlyinginflation(oftenreferredto
as “core inflation”) already appears to be moderating. This will likely continue over the coming months as easing supply chains, higher
borrowingcosts,squeezedconsumerincomesandfallinghousepricesservetocooltheglobaleconomyanddampendemand.
- By Alex Teddar - Head and CIO of Global and US Equities – Schroders
Source: New York Fed, Schroders, Axis MF Research. Data as of 21st December 2022.
Global Supply Chain Pressure Index
-1
0
1
2
3
4
5
May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21 Nov-21 May-22 Nov-22
Againstthisbackdropitisconceivablethatwagedemandswillalsomoderate.Manyobserverspointtotheongoinglabourshortagesin
many countries and rapid increase in strike action as reasons to be cautious about wage inflation. However, we suspect that labour
flexibility will improve as economies slow. Companies will undoubtedly postpone hiring and trim workforces. Indeed, there are already
clearsignsofthisinthetechnologysector,wheremanagementrhetorichassuddenlycaughtupwitheconomicreality.
In addition, it is possible that the participation rate, currently at record lows, will increase as non-participants, such as many over-50s,
decidetore-entertheworkforce.
Finally, it is likely that the recent trend toward labour substitution through automation will accelerate meaningfully, particularly given
recenttechnologicalprogress.
In short, while a return to mass unemployment looks unlikely, it is entirely possible that a rise in vacancies, coupled with a modest
increaseinthenumberofparticipants,capswagecostsinthefuture.
Fears of a deep recession may prove unfounded
An ongoing economic slowdown seems inevitable given the above, but fears of a deep recession may prove unfounded, at least in some
countries. With unemployment so low, consumers are better able to weather higher costs. Government action to provide support with
energybillsalsocushionsthatimpacttoo.Itisnotablethathouseholdbalancesheets,whichbenefittedfromaconsiderablebuild-upof
savings during the Covid-19 pandemic, provide a buffer for many consumers (although clearly not sufficiently for the poorest income
groups).
Thepictureissimilarinthecorporatesector,whereleverageisrelativelylowandoflonger-than-averageduration.
Overall, the above suggests to us that, while material economic challenges remain, inflation may be less entrenched and the economic
downturn less severe than many envisage. This is potentially most likely in the US, which is effectively self-sufficient in energy, benefits
substantially from the fact that nearly all major commodities are priced in US dollars and has positive immigration. In Europe, including
theUK,thepictureisunfortunatelymuchmorenuanced.

An earnings recession
Recession or not, earnings estimates will have to come down. One of the interesting features of the current market cycle is that while
sharepriceshavecollapsed,earningshavesofarmostlybeenremarkablyrobust.Thereasonforthisispricing.
OnbothsidesoftheAtlantic,companieshaveputthroughpriceriseswithimpunity:Pepsihad+17%positivepricinginthethirdquarter,
forexample,whileinEuropeLouisVuittonandNestlebothhaddouble-digitpriceupliftswithlittleimmediateimpactonvolumes.
In these specific cases revenues may well hold up, since consumers appear willing to pay up for premium products. However, for many
companiesitisonlyamatteroftimebeforenegativeelasticitykicksinanddemandstartstofall.
Early indications from the likes of Amazon and Target in the US, or M&S, H&M and Primark in Europe suggest that consumers are
alreadycuttingtheirspending.
Revenue and margins (excluding energy companies) look likely to fall in 2023, creating a proper earnings downgrade cycle that is yet to
befullyreflected.
Finding the bottom may sound counter-intuitive given the above, but our view is that the current bear market has nearly run its course.
Albeitwiththecaveatthatvolatilityislikelytoremainelevatedforsometimetocome.
ConsensusS&P500earningspershareof$225and$235stilllooksomewhathigh,andweexpectthesetobereviseddownsteadilyover
thecomingmonths,withthetroughtooccurinthethirdquarterof2023.
But stock markets always look ahead, typically discounting a trough in earnings six to nine months ahead of the actual trough. That
suggests that the recent bounce in global equity markets (the Dow index had its best month since 1976 in October) was not without
logic,althoughwedobelievetherecentrallytobesomethingofafalsedawn.
Intheveryshort-term,theremaybesomefurtherdisappointmenttocome,asprofitabilitypressuresbecomemoreapparent.
Navigating the bear market
Most bear markets trough around 9 months before a recovery in corporate earnings per share

Risk and return
We haven’t dwelt on ongoing geopolitical risks, such as further escalation in Ukraine; the possibility of further reduction in Russia’s gas
supply to Europe; or China’s stance on Taiwan. These are potential “Black Swan” events that are binary in nature and impossible to
predictwithanycertainty.
Anyoneofthesepossibilitieswouldbeextremelybadforglobalmarkets.Onemusthopethatcommonsensewillprevail.
Regardless though, the events of the past year will only serve to strengthen certain trends that were already apparent before the
currentcrisis.
Security – national security, energy security, food security, cyber security (to name but a few) must now be considerably higher on
governmentandcorporateagendasthaninthepastdecade.Russia’sexploitshaveproventhatenergydependenceonanerraticpartner
can be disastrous. China is likely to remain a much more rational, measured player than Russia, but President Xi’s agenda is clearly
expansionist.
Securing security of supply
We see a wave of spending being directed by governments and companies toward achieving greater security of supply: whether
through investment in renewables; re-shoring or re-locating production facilities; supporting new methods of food production; or
protecting industries that are strategic in nature such as semiconductors, software, or bio-technology. A polarisation of sorts between
theWestandtheEastseemsinevitableintheseareas.
Wearefocusedoncompaniesthatcanprosperinachallengingenvironmentanddosowithareasonablelevelofrisk.Manyoftheseare
intheareasoutlinedabove,wherestructuralgrowthratesareclearlyhigherthantheywere.
Equallythough,asthebearmarketmatures,ourresearchistakingustoseveralareasthathavebeenoutoffavourforsometime,suchas
Japan.
We will leave you with the startling revelation that, thanks to low wage inflation and a highly competitive currency, it is now cheaper to
hireasoftwareengineerinTokyothanitisBangalore.
Therearealwaysopportunitiessomewhereintheworld.
Path of earnings and valuations around recessions
Valuations have already moved significantly lower
Earnings typically continue to fall but P/E stabilises after a recession starts
Disclaimer:
The above graph is used to explain the concept and is for illustration purpose only and should not used for development or implementation of an
investmentstrategy.
Pastperformancemayormaynotbesustainedinthefuture.
Viewsandopinionscontainedhereinareforinformationpurposesonlyandshouldnotbeconstruedasinvestmentadvice/recommendationtoanyparty
or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information
and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek
professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed
herein.
MutualFundInvestmentsaresubjecttomarketrisks,readallschemerelateddocumentscarefully

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Annual Outlook 2023.pdf