It’s worrying people only want to invest in equities: S Naren, ICICI Pru MF
, ET Bureau|
Updated: Nov 13, 2017, 03.40 PM IST
S Naren
, chief investment officer,
ICICI Prudential Mutual Fund
, said valuations are not cheap, but the cycle is attractive. He told Prashant Mahesh that over the next two years, as capacity utilisation goes up, earnings will catch up, and one should invest in dynamic asset allocation funds and large caps.
Edited excerpts:
Post demonetisation, the Nifty has returned 22%. Retail investor sentiment towards equity as an asset class is very positive and they continue to pour in money. Will they continue to get high returns?
The biggest worry for me is that people want to invest only in equities. The most important thing to remember now is asset allocation. If investors ignore its importance in this part of the cycle, they will suffer in the long run. They should invest in both equity and debt, and do SIPs in both these asset classes. We are very uncomfortable with people who say they want to invest in just equities. The biggest challenge is that slowly people will forget asset allocation and say there is one asset class, and that is equity. Across the world, people have not seen negative returns in equities and forgotten about the risks in equity. The current valuations suggest mediumterm returns have to be moderated. Short term, we always know it's difficult to predict. All our campaigns are around our dynamic asset allocation fund, which is meant for moderate return expectation from here. If market is to go up higher from here, large-cap funds will do better.
Corporate earnings are yet to catch up. What are your thoughts?
I am sure it will catch up in the next two years. Valuations are not cheap, but the cycle is attractive. The combination of value and cycle makes it equal. In the next two years, as capacity utilisation goes up, earnings will go up. You have low base as you have not had earnings growth for four years now. In fact, we are not at all worried about earnings. Today I have one big advantage that it has not come yet. The day earnings come is the time to worry, as then you have to decide what to do next.
While the market has moved up significantly, pharma and IT stocks continue to underperform. Do you think they are good bets?
Pharma and IT are excellent areas to invest in a systematic way. In the short run, as market goes up, sectors outside IT and pharma can still do better. But in medium to long term, these sectors make for excellent investment. The truth is that when bull market extends beyond a point, IT and pharma don't do well in the medium term. If you are willing to invest for a medium term, there is no problem. We tell investors to invest systematically in these sectors using systematic investment plan or systematic transfer plan.
Last month, the government announced a massive PSU bank recap programme. Will this change the outlook for PSU banks?
It will help PSU banks come out of woods. However, we are not believers that credit growth will shoot up just because bank recapitalisation happens. It will shoot up when private sector capex cycle will happen, and that will happen in the next 12-24 months. We don't see any evidence of a private sector capex now. But when that cycle happens in the next 12-24 months, maybe there will be a requirement of credit growth. Right now, any solvent borrower can still find money, and the requirement of money is lower because the capital utilisation in Indian industry is low.
GST has been one major reform this year. Have things settled down?
Whenever there is a big cuttingedge reform like GST, there will be problem which will be resolved over time. That also means over the next two years, earnings will improve as GST-related transition issues go away. Implementation of whatever is done will be the focus in the balance of this election cycle and the government will iron out whatever problems come in the way.
You are coming up with a public issue of Bharat 22 ETF at a time when market valuations are near record levels and there is some fatigue in the IPO market. Some of the recent insurance offerings and few others have left no money on the table for investors. What are your thoughts?
Bharat 22 ETF is a good combination of SUUTI stocks and public sector companies. The top two stocks — ITC and L&T — account for 31% of the portfolio. It's a fully large-cap portfolio with upstream oil, power and public sector banks. All the stocks are carefully chosen and the companies in the portfolio are fundamentally strong. Given that you have a very low expense ratio on the fund and 3% discount on offer, it is an attractive proposition for HNIs, institutional and retail investors. The fatigue may be there in equity IPOs, and the bulk of the issues are there in insurance. However, if you look at the portfolio of this fund, you are getting conventional stalwarts. This is not a conventional IPO, but a disinvestment of companies which have been in existence for long.
Edited excerpts:
Post demonetisation, the Nifty has returned 22%. Retail investor sentiment towards equity as an asset class is very positive and they continue to pour in money. Will they continue to get high returns?
The biggest worry for me is that people want to invest only in equities. The most important thing to remember now is asset allocation. If investors ignore its importance in this part of the cycle, they will suffer in the long run. They should invest in both equity and debt, and do SIPs in both these asset classes. We are very uncomfortable with people who say they want to invest in just equities. The biggest challenge is that slowly people will forget asset allocation and say there is one asset class, and that is equity. Across the world, people have not seen negative returns in equities and forgotten about the risks in equity. The current valuations suggest mediumterm returns have to be moderated. Short term, we always know it's difficult to predict. All our campaigns are around our dynamic asset allocation fund, which is meant for moderate return expectation from here. If market is to go up higher from here, large-cap funds will do better.
Corporate earnings are yet to catch up. What are your thoughts?
I am sure it will catch up in the next two years. Valuations are not cheap, but the cycle is attractive. The combination of value and cycle makes it equal. In the next two years, as capacity utilisation goes up, earnings will go up. You have low base as you have not had earnings growth for four years now. In fact, we are not at all worried about earnings. Today I have one big advantage that it has not come yet. The day earnings come is the time to worry, as then you have to decide what to do next.
While the market has moved up significantly, pharma and IT stocks continue to underperform. Do you think they are good bets?
Pharma and IT are excellent areas to invest in a systematic way. In the short run, as market goes up, sectors outside IT and pharma can still do better. But in medium to long term, these sectors make for excellent investment. The truth is that when bull market extends beyond a point, IT and pharma don't do well in the medium term. If you are willing to invest for a medium term, there is no problem. We tell investors to invest systematically in these sectors using systematic investment plan or systematic transfer plan.
Last month, the government announced a massive PSU bank recap programme. Will this change the outlook for PSU banks?
It will help PSU banks come out of woods. However, we are not believers that credit growth will shoot up just because bank recapitalisation happens. It will shoot up when private sector capex cycle will happen, and that will happen in the next 12-24 months. We don't see any evidence of a private sector capex now. But when that cycle happens in the next 12-24 months, maybe there will be a requirement of credit growth. Right now, any solvent borrower can still find money, and the requirement of money is lower because the capital utilisation in Indian industry is low.
GST has been one major reform this year. Have things settled down?
Whenever there is a big cuttingedge reform like GST, there will be problem which will be resolved over time. That also means over the next two years, earnings will improve as GST-related transition issues go away. Implementation of whatever is done will be the focus in the balance of this election cycle and the government will iron out whatever problems come in the way.
You are coming up with a public issue of Bharat 22 ETF at a time when market valuations are near record levels and there is some fatigue in the IPO market. Some of the recent insurance offerings and few others have left no money on the table for investors. What are your thoughts?
Bharat 22 ETF is a good combination of SUUTI stocks and public sector companies. The top two stocks — ITC and L&T — account for 31% of the portfolio. It's a fully large-cap portfolio with upstream oil, power and public sector banks. All the stocks are carefully chosen and the companies in the portfolio are fundamentally strong. Given that you have a very low expense ratio on the fund and 3% discount on offer, it is an attractive proposition for HNIs, institutional and retail investors. The fatigue may be there in equity IPOs, and the bulk of the issues are there in insurance. However, if you look at the portfolio of this fund, you are getting conventional stalwarts. This is not a conventional IPO, but a disinvestment of companies which have been in existence for long.
