Strong fundamental underpinnings to market rally: ICICI Pru AMC's S Naren

S Naren, ED & CIO, ICICI Prudential AMC
The markets hit record highs last week with Reliance Industries (RIL) becoming the first listed company in India to hit Rs 10 trillion in market capitalisation. S Naren, executive director and chief investment officer, ICICI Prudential Asset Management, tells Puneet Wadhwa that from a long-term view, mid- and small-caps are better placed than large-caps. Edited excerpts:

The indices hit record highs last week. What’s your message for retail investors in this backdrop? Should they still increase allocation to equities?

The optimal approach for an investor currently would be adhering to asset allocation discipline. It is important to stay invested not only in equities, but also debt. Within equity, if an investor is ready to stay invested for over five years, he/she can consider mid- and small-caps, value and multi-caps in a systematic manner. This is because of relatively attractive valuations in these pockets. Similarly, within the debt space, we continue to remain positive on the credit space, given the attractive valuations.

Have the markets run ahead of fundamentals? How do you see CY20 playing out for the markets?

Market fundamentals have improved following the government's decision to cut corporation tax rates, good monsoon, and huge central bank support, which have led to a global equity rally. While the markets are not cheap, there are strong fundamental underpinnings to this rally. It is difficult to make a call on the near-term market outlook as quality names continue to be costly and value names languish.

How comfortable are you with the market valuation at this stage?

Post the rally in large-caps, valuations are fully priced in but earnings growth is yet to pick-up. The current equity market performance is driven by a few select growth stocks making value as a theme attractive. Given the significant disconnect between valuations of ‘growth’ and ‘value’ stocks, we believe value and special situation themes are expected to play out well from a medium-term perspective. Currently, quality names are costly across market capitalisations. From a long-term view, mid- and small-caps are better placed than large-caps.

The last gross domestic product (GDP) data came in as a surprise. How are you viewing the entire economic slowdown debate?

The business cycle is in a contractionary phase, which can be seen through data from various points such as private consumption, air traffic, and credit growth. GDP numbers, too, indicate a slowdown. When it comes to the slowdown in consumption-related names, the current trend is likely to persist in the near future, as this theme is just coming off a long period of up-cycle. We believe in the current economic environment; fiscal deficit is unlikely to be a major 
problem.

How long will it take for the growth rate to pick up?

We are of the view that growth will slowly pick-up as we are close to the bottom. There are market expectations of further government reforms like the abolition of dividend distribution tax (DDT) and reduction in individual tax cuts.

What’s your view on PSEs after the government announced strategic divestment plans last week?

Stocks of PSEs are available at an attractive valuation. We believe the government will continue with strategic disinvestments. However, there could likely be an overhang if substantial disinvestment were to take place in non-strategic names.

What are your overweight and underweight sectors?

There has been no major disappointment in the Q2FY20 earnings season. We are currently overweight on power, telecom, metals, and mining. We remain underweight on banks and financials, consumer non-durables, and software.

The telecom, the oil & gas and the banking sectors have been in news recently. Your view on these?

At this point in time, the telecom sector is dependent on government policy, which remains an important determinant for developments in this sector. For the oil & gas sector, we believe strategic disinvestment is a big positive. Banking continues to remain under pressure with declining credit growth, but the situation with corporate NPLs is improving.


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