Fundamentally sound stocks are available at inexpensive valuation: S Naren

"Investors have realised the trouble in the debt markets is not systemic and it has been business as usual for fund houses with good quality underlying debt paper," Naren said

S Naren, executive director and chief investment officer at ICICI Prudential AMC, speaks with Puneet Wadhwa about the road ahead for the markets, investing strategies in the equity and debt segment. Edited excerpts:

The markets, you said in March, presented a once-in-a-decade chance to invest for the long term. Leading indices have surged since then. What is your advice to investors now?

Investor sentiment in March after the market correction was that of panic. At the same time, equity valuations were cheap and presented a once-in-a-decade opportunity, akin to 2008 and 2001. In the near-to-medium term, market volatility cannot be ruled out owing to geopolitical and Covid-19-related developments.

The best approach to investing is through multi-asset, dynamic asset allocation funds/balanced advantage category funds, which will be well placed to make the most of opportunities present across asset classes. Further, one should continue with the existing systematic investment plans (SIPs). Unlocking the economy in a phased manner is a prudent step. This will help the economy get back to normal slowly and steadily. Meanwhile, investors should keep a tab on the infection trend.

Where do you see opportunities in the current market?

In India — and globally — a few stocks have delivered the bulk of the returns. We believe these stocks are meaningfully overvalued relative to the market. Cyclically, it appears these stocks are in the end-cycle, whereas the rest of the market is not. Value, small-, and mid-caps are in the early stages of the cycle. Fundamentally sound stocks are still available at inexpensive valuation, providing good dividend yield and reasonable earnings visibility. Long-term investors looking for lump sum investment opportunities can consider value funds. Small- and mid-cap funds are another segment close to its cyclical bottom. This market segment can deliver outsized returns over the long term.

Will global central banks continue with their ‘easy money’ policy?

The equities markets globally have done well over the last 12 years, largely due to the role of central banks. In the future, there exists a risk of their inability to control an equity market decline. The only way to guard against this risk is by having adequate exposure to debt mutual funds, besides gold and equity exposure governed by asset allocation rules. However, no fund manager can predict when this risk can play out over the next decade.
 

Will US equities continue to rise until the presidential elections are over?

The US equity market is heading towards a bubble with the US large-cap and tech names currently transitioning from boom to a bubble phase. It is very easy to bring down interest rates to zero, but how do you take them up is something that the world is still thinking about, and that is a challenge at this point. In 2012, US equities were in the early stages of the market cycle.

Unfortunately, investors are now interested in investing in US funds, which, we believe, is close to the top of the cycle. At some point, the US Federal Reserve will try to cut its accommodative stance and reduce the amount of liquidity. One can then expect a correction across markets, including India.
 

Your sector preference?

Software, pharmaceuticals, power, telecom, metal, and mining are some sectors we are overweight on. We remain very selective in banks and finance, and have been underweight on the consumer non-durables space for a while. After the Covid-19 pandemic, personal mobility oriented thinking may give a fillip to the auto sector.
 

There have been massive outflows in credit funds during April and May. Is the worst over?

Investors have realised the trouble in the debt markets is not systemic and it has been business as usual for fund houses with good quality underlying debt paper. Credit as an asset class remains attractive due to valuation comfort owing to the high spread between accrual schemes and repo, which provides a good margin of safety for investments made. The gap between yield to maturity of credit funds and the repo and the reverse repo rates of the Indian market is at its widest, signifying that credit funds are at their lowest valuation and make it one of the most interesting categories to invest in a lump sum for the long term. When asset classes are at the bottom of the cycle and valuation, it is the best time for a lump-sum investment in an aggressive way.
 

Where do you see opportunities in the debt segment?

Both the duration and credit offer attractive investment opportunities. For those looking to park money for a short span can consider the liquid-plus and ultra-short category of funds. Since the yield curve continues to remain steep due to high risk aversion, short- and medium-duration funds present an interesting investment opportunity. From a longer-term investment horizon, investing in dynamic duration schemes can be considered. Investors, who do not invest in debt mutual funds, are missing a very important and a stable asset class in their portfolio.