Tuesday, January 24, 2023

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He also manages the All-Weather portfolios.

Do Layoffs Even Matter?

Tech layoffs have dominated headlines globally this week. Alphabet, Amazon, Meta and Microsoft all announced job cuts that will affect nearly 50,000 employees combined.

Ideally, one would feel the large number of tech layoffs are a sign of distress in the economy, and that would mean another sign of relaxation on monetary policy tightening, right? Wrong.

Here’s why the seemingly massive tech layoffs don't matter much:

  1. Tech giants are laying people off, but they had also hired massively since the beginning of COVID. Over differing periods between 2020 and 2022, Alphabet had hired more than 35,000 people. Microsoft had hired 40,000 and Meta was at more than 25,000. The recent firing is hardly a big deal compared to the ballistic growth that tech companies had seen in a sit-at-home digital boom.
  2. The US Fed takes employment data seriously on decisions around rates. However, the overall tech sector contributes to less than 10% of the total workforce. The tech job cuts hence although huge are just a fraction of the whole deal. ‘Surprisingly’, this week’s data also suggested jobless claims dropped to their lowest level since September. The labor market is still red hot.

No wonder, despite lower inflation, a troubled housing market, and a sharp fall in retail sales, Fed officials still made hawkish comments saying they are ‘determine to stay the course’ until inflation is back at the target 2%. With this, global markets continue to be dominated by opposing reactions on hope and data.

<aside> 💡 Our View: While global markets see periodic relief rallies on hope, there is no taking away that 2023 looks bad as the economic downturn kicks in, and is set to worsen through the year. In this context, we have been ruling out exposure in the international markets. Strategy - focus on India (and China - more on this next week)!

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Idea - Investment Themes for 2023 🧠

While, in hindsight, Nifty provided a mere 3% return in 2022, some themes and sectors were stellar outperformers, with banks making money off the strong credit cycle, resilient consumption that led to consumer stocks skyrocketing and value stocks being the risk-averse investor’s best friend.

But making money is about foresight and not hindsight. Here are some themes that stick out as possible bets for 2023:

  1. Elections

    With the nation at the pivotal point of the 2024 elections, the upcoming Union Budget is vital towards garnering public support and visible growth - hence the probability of massive CAPEX outlay into infrastructure, cement, construction, engineering, and rail.

    <aside> 💡 L&T, Rail Vikas Nigam

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  2. Budget

    The 2022 Budget saw 13% of it allocated to the defence sector (10% YoY increase) and this trend is likely to continue, as the efforts to indigenize and export Indian-made defence infrastructure are propelled, amidst geo-political tension.

    <aside> 💡 Hindustan Aeronautics, Bharat Dynamics

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  3. PLI Scheme

    The Production-Linked Incentive scheme was launched by the GoI to boost manufacturing capacity. With a Rs. 10 lakh crore CAPEX outlay (33% YoY growth) projection, sectors like auto, chemicals, telecom and industrials can benefit.

    <aside> 💡 Motherson Sumi, Lakshmi Machine Works

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  4. Debt

    Debt funds and bonds are looking attractive in 2023. The rate hikes of 2022 caused yields to rise and prices to fall, leading to underperformance. With the expectation of a stoppage or reversal of that trend, a price rise might be imminent.

    <aside> 💡 DSP Corporate Bond Fund, Nippon India Nivesh Lakshya Fund

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