A revival of the capex cycle or the deleveraging of infrastructure and real estate sectors would support earnings growth. There doesn't seem to be visibility on these two sectors getting deleveraged for the next 3-6 months, said S Naren, chief investment offier, ICICI Prudential AMC.
In an interview with Sourabh Pandhare, S Naren said, 'We believe that corporate performance is likely to pick up only after December 2015 quarter. However, earnings should not worry a long-term investor with an investment mind set of 3-5 years.' Interview Excerpts:
Narendra Modi led NDA government has completed one year in office last month. Recent survey by Deutsche Bourse showed a drop in business confidence to pre-Modi levels. What is your take on this? Do you think business confidence will improve going forward?
A stable Government is a structural positive for the economy. In a large democracy like India, it is important to give a reasonable span of time to the Government in order to see things improve on ground. The Government has taken several positive steps, be it in terms of the Insurance Bill, the issues regarding gas power plants, or the coal auction. The Government is also focused towards elimination of bottlenecks in the infra space. We believe that India is on the path to increasing growth.
Going further, land reforms, GST and ease of doing business in terms of labour reforms and time bound model of giving clearances are the key reforms that need to be implemented.
Quarter after quarter, corporate financial performance remained lacklustre. March 2015 quarter was no exception. There has been mild increase in corporate earnings. Sales growth was slightly better than earnings growth. According to you, when do you see turnaround in corporate performance?
We believe that a revival of the capex cycle or the deleveraging of infrastructure and real estate sectors would support earnings growth. There doesn't seem to be visibility on these two sectors getting deleveraged for the next 3-6 months. We believe that corporate performance is likely to pick up only after December 2015 quarter. However, earnings should not worry a long-term investor with an investment mind set of 3-5 years.
Could you throw some light on your fund management style? How frequently you review and churn fund portfolio? What are the key things you look at before taking a buy or sell call in a particular stock?
In the first part, we look at the stocks which have performed badly. We also figure out why institutional investors are underinvested and why external analysts have degraded that particular stock - this is the starting point for us. Similarly, we also look at stocks which have done well and why institutional investors are overweight, and why analysts have put 'BUY' for that particular stock.
In both the scenarios, we try to make a case to move out of a set of stocks, which have done well, to stocks which have done badly. In the next part, we try to find out why people are negative on that stock, meet the management of the company and do our own internal research. But that is not enough; when we are using value investing, we figure out whether that stock can improve from the current situation. We meet the companies and sector analysts among all the brokerages. After going through all the annual reports, participating in conference calls, we looks at where the stock is placed in a cycle and then decide whether the stock should be bought or not.
So it's a combination of cycles, sector, industry and company valuations - all these factors are considered before including the stock in the portfolio. A combination of underinvestment and valuations gives us the best value investment.
Equity funds of ICICI Prudential Mutual Fund have outperformed benchmark indices on consistent basis. What according to you has helped you to deliver better performance?
At ICICI Prudential Mutual Fund, we believe that a disciplined investment approach, robust research process and keen focus on identifying long-term picks have led our equity funds to outperform the benchmarks reasonably. Every fund remains true to its label in terms of following its investment mandate.
We focus simultaneously on the 'top down' and 'bottom up' strategies. The other cornerstone of our philosophy has been to not change strategy after failure. Having said this, we do keep revisiting our rationales of buying and selling and look for any change in the variables and assumptions, and act accordingly. This has helped them to stand behind conviction calls without worrying about short term performance, and focus on long term performance.
Recent Fact Sheet showed high exposure to banks, software, automobile and power sectors in the most of equity oriented funds. What is the rationale behind betting big on these sectors? How do you see these sectors performing in next one year?
A cyclical revival would eventually happen. Consequently, cyclical sectors like infrastructure and financials could do well in the long-term. Also, given the fact that rupee has appreciated substantially when compared with Euro, technology sector which has been hurt by this rupee movement is likely to benefit, since we believe that rupee is not likely to continuously appreciate against Euro. We have invested in technology and financial sectors after the recent corrections. Sectors like consumers appear to be richly valued. Therefore we remain underweight on the same.
What is your opinion on high growth high P/E stocks? Are they really performing better than their counterparts?
Currently, there are a set of quality stocks that are richly valued with trailing multiples of 40-60 times of earnings and above, at the forefront of investors' attention. We would consider investing in such stocks only when their valuations become moderate.
On the other hand, the market has on offer a certain set of stocks that are under-priced and offer a positive long term outlook. Since these stocks have offered modest returns over the 8-year period (2007-15), they are not in the limelight. Investors have shunned these stocks for want of attractive returns. We believe that selecting such stocks can offer opportunities of reasonable returns especially considering the fact that increase in valuations from them is long overdue. We undertake intensive research and analysis to select suitable stocks and assess their long-term growth potential.
Do you think the recent fall in the stock market was excessive? How do see the market outlook for next one year?
No market goes up in straight line. This rally has not seen any correction for a long period of time. Given the fact that earnings did not pick up, we believe that the correction was logical. Even in the 2002-07 bull market, there were many corrections throughout the phase; while, this maybe just the first correction of the current phase.
While, we saw a bout of volatility over the last 2-3 months, these corrections are healthy because it ensures that investors moderate their return expectations. Also, investors who are still underinvested in equities get an opportunity to invest in such times. We recommend investors to invest in equities with a medium to long-term investment horizon in order to create reasonable wealth.
The rate hike in US this year due to a strong economy or a Greece exit from EU could result in near-term volatility in global markets. However, it does not affect our market view over the long-term. Also, a strong US economy is favourable for global as well as domestic markets.
What is your advice to investors at this point in time?
We recommend defensive equity investing with products in the balanced advantage and dynamic asset allocation category like ICICI Prudential Balanced Advantage Fund and ICICI Prudential Dynamic Plan as suitable ways to help ride the volatility. These funds invest in equities when markets are cheap and book profits when markets are rising, thus limiting risk and aiming to provide good returns. Investor should consider investing in such funds with an aim to benefit out of volatility.