DAILY VOICE | US market heading for bubble zone, one could consider investing in non-US global equity: S Naren of ICICI Pru MF

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© Kshitij Anand DAILY VOICE | US market heading for bubble zone, one could consider investing in non-US global equity: S Naren of ICICI Pru MF

S Naren of ICICI Prudential Mutual Fund, who has over 30 years of experience in the capital market, is of the view that the US market is heading to a bubble zone and a correction could play out anytime in the future.

Naren, who is ED & CIO at ICICI Pru MF, is of the view that one could consider investing into non-US, global equity, and one can even opt for funds or Fund-of-Funds which invest across different international markets and across different geographies, he said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) Market seems to be steadily climbing higher. It looks like we could head higher towards 49500-50000 on the Sensex and about 14500-14700 on the Nifty. What is your outlook on the markets for the year 2021? What are you recommending investors to do?

A) Indian equity markets are in the midst of a developed world’s Central Bank driven bull market. Market sentiment too is robust on account of the revival in the economy as can be seen through the various high-frequency data points, the decline in interest rates, pickup in credit growth, the decline in COVID infection numbers etc.

All of these have ensured that the rally seen in recent times is much more broad-based in nature.

It is very likely that the current market trend is likely to continue in the near to medium term because of the global liquidity factor. It remains to be seen if the US Fed will continue pumping trillions of dollars into the financial system.

As long as this stance continues, the chance of a major correction in the equity market looks unlikely. What can dent the market in the meanwhile, especially in the Indian context, is the substantial rise in crude oil prices.

From an investor perspective, in a boom phase, investing requires absolute care. Given that equity as an asset class has rallied continuously, one has to be cautious. At such times, adhering to asset allocation is of absolute importance.

Spread investments across equity, debt, gold etc., rather than going overboard on any one particular asset class. This will ensure that whenever there is a correction, the portfolio is not adversely impacted.

One can also achieve this through investing in asset allocation schemes. By staying invested in such schemes, one can gain from market volatility by participating in the rally through exposure to equities while the presence of debt ensures downside protection to the portfolio.

For those looking to invest in equity schemes, one can consider investing in funds with a value bias. This is because growth and quality has significantly rallied but the value is yet to catch up. We believe we are in the early stages of value playing catch-up.

The other investment which investors can consider is funds that take a call based on the economic macros. This is where the ICICI Prudential Business Cycle Fund comes in.

Here, the objective is to invest across three to five sectors that we believe will stand to gains based on where they are placed in terms of their respective business cycles.

In line with our framework of reviewing calls based on macro-economic developments, we would review our call if crude oil crosses $60, US 10-yr surpasses 2%, surplus liquidity with RBI comes off sharply, in case if global money market asset under management falls sharply or in the event of some unforeseen geopolitical risk.

Q) What are your contra bets or themes for the year 2021?

A) Sector-wise, power, telecom, metal, and mining are our contra bets.

Power: The relaxation of lockdown measures has improved power demand and capacity utilization at plants has also seen improvement. This may help in improving the margins of power generation companies in the quarters ahead.

Telecom: Tariff hikes in the future look likely. This could be either regulator-driven or market-driven in order to improve the Average Revenue per User (ARPUs) and the financial health of the industry.

Higher Data usage post-Covid-19 and Fibre-to-the-Home (FTTH) and Enterprise connectivity businesses, which are still at a nascent stage, could become the new growth engines.

With the consolidation of India’s Telecom industry largely complete, the wireless industry’s revenue is expected to double to ~INR 2,600bn by FY25E.

Metals & Mining: For nearly a decade, metals have witnessed weak demand. Apart from this, weak global prices, the restrictive regulatory environment has resulted in weak earnings and stretched balance sheets.

This coupled with an easy monetary policy stance of Central Banks may create the base for the next commodity up-cycle in India.

Over the next 10 years, India’s structural demand should increase by 4-5% CAGR driven by India’s increasing urbanization, which at ~35% sits among the lowest in the large economies.

Q) Mid & Small-caps seems to be the talk of the town because broader markets are outperforming in this rally. What is fuelling optimism in the broader market space, and will the momentum continue in 2021? What is your recommendation to investors for this space?

A) Mid and small caps have underperformed large caps in the last couple of years and that trend is expected to reverse. In a low-interest rate environment, small and mid-cap companies stand to benefit the most.

In the quarters ahead, it is very likely that the profitability of fundamentally strong companies in the broader markets is likely to improve and soon enough the same will be reflected in the stock price as well.

So, if an investor is ready to stay put for the next five years, one can consider investing into broader markets, but through the SIP route.

Q) International investing is another area that has garnered investor interest over the last couple of years. What is your view on global markets since most of them have rallied significantly this year?

A) Over the last few years, the investor interest in schemes that invest across different geographies, especially the United States has gathered pace.

This trend could largely be on account of the robust return profile these funds posted over the past years. Nevertheless, it is time for investors to strike a cautious note especially for those looking to invest in the US market.

We believe the US market is heading to a bubble zone and a correction could play out anytime in the future.

So, one could consider investing in non-US, global equity. One can opt for funds or Fund-of-Funds which invest across different international markets and across different geographies.

Q) Several of your equity schemes have logged in sharp gains over the past few months. To what do you attribute this turnaround?

A) Most of the portfolios, across equity schemes, consisted of names including PSUs, especially those which offered value in terms of business fundamentals and viability.

Economic recovery as a theme was at the core such that sectors/ themes which perform well during periods on economic turnaround were built into the portfolio.

The idea here was to concentrate on future potential gainers/leaders. Another factor that benefited some of the portfolios was the increase in exposure to companies that may benefit from disruption due to the COVID-19 impact or which can tide over the dislocation of the supply chain.

In such schemes, the exposure towards rural economy-oriented companies benefited given the sustained demand from these pockets.

Q) Do you reckon there is room for value investors at a time when momentum has been fuelling the current market rally?

A) We believe the divergence between Value and Growth stocks continues to prevail, though it has reduced with time. Value as a theme still continues to be relatively attractive to growth.

We believe there are still pockets of opportunities in the value space providing good dividend yield and have better earnings visibility. Hence, we recommend investors to take exposure to schemes with a Value bias.

Q) How is ICICI Prudential Business Cycle Fund different from other schemes?

A) Calendar 2020 was the year where we saw several sectors outperform in a small span as the pandemic raged across the globe. Towards the middle of the year, there was a sectoral change in leadership, all of which occurred very swiftly.

Historically, it is opportunities such as these which open doors for wealth creation opportunities as the business cycle shifts.

For tapping into such opportunities one requires a comprehensive understanding of market/business cycles, analysing policy responses, and taking exposure to the right sectors at the right time.

Through this fund, our endeavour is to invest based on macro trends. At a time when the economy is growing at a faster pace, the aim of the fund will be to invest in sectors that are closely related to the economy and when there are times of economic slump, the portfolio will be positioned to move towards the defensives as a means to limit portfolio downside.

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