Valuations not as cheap as they were in early 2016: Sankaran Naren

Interview with Chief investment officer, ICICI Prudential

The markets have seen six months of a healthy run-up. Sankaran Naren, executive director and chief investment officer at ICICI Prudential AMC, tells Puneet Wadhwa that though the outlook remains bullish, this upward move will be fraught with volatility. Edited excerpts:

How are the global markets likely to play out for the remaining part of calendar year 2016? Any key events to look out for?

For the rest of the year, the issue is largely going to be the balance between growth rates and macro stability versus interest rates. If growth rates remain stable or improve without too much increase in bond yields, it is likely to keep equity markets healthy. In this respect, the key variables to track are US bond yields, China's growth and currency movement, among others.

Are the bond markets now signalling a bubble-like situation for the global financial markets?

While bond yields are at a multi-decade low in developed markets and in some countries have turned negative, it is also a reflection of the weak growth globally. The structural issues of worsening demographics and high levels of debt to Gross Domestic Product (GDP) in most large economies seem to be posing severe headwinds to global growth. While this phase continues, it is unlikely that the regime of very low interest rates will go away. Hence, we believe bond markets might have pockets of overvaluation but, primarily, they are reflecting the paucity of growth.

Is the strength in gold an indication of a risk-off phase ahead?

Generally, gold, like most other commodities, does well when the (US) dollar weakens against other commodities. After a three-four year phase of the dollar strengthening against emerging markets, we have seen a big bounce-back in emerging markets' currencies this year, especially those of Brazil, South Africa, Russia. To that extent, the strength in gold might not be an indicator of risk-off but a shift of funds from developed to emerging markets.

Will the Indian markets enter a long period of consolidation, in the absence of any major triggers?

We believe today's valuations of the Indian market broadly imply that market returns would be close to earnings growth on a two to three-year basis. Some of the themes we believe could do well are private banks, logistics, health care and telecom.

How do the valuations look at these levels?

These are not as cheap as at the start of this year. When it comes to large-caps, we do not see that as an over-priced space, as yet. This is primarily as the run-up in the broader market has been much sharper than seen in large-caps. In the mid-cap and small-cap space, companies are available at reasonable valuations, though several names are trading at expensive ones.

For someone who invested in February, is it time to take some money off the table? What are the other investment avenues available in such a scenario?

This is a time to stay invested. We believe the Indian equity market will continue to edge higher over the next two years as, 1) earnings have bottomed-out; 2) increase in capacity utilisation will help top-line in the near term; 3) benefits of a good monsoon trickling in after two years of deficient monsoon; 4) government policies coming into play, thereby improving the micros.

At the same time, one should be mindful that this upward move will be fraught by volatility. Therefore, investors should invest through SIP (Systematic Investment Plans) and STP (Systematic transfer Plans) into pure equity funds, with an aim to capitalise on market volatility. For investors looking for lower volatility and for lump-sum investments, we recommend dynamic asset allocation funds.

Given this backdrop, how do you see earnings growth for India Inc in FY17 and FY18?

India is in the midst of an economic uptrend. In terms of earnings, we believe, the worst is over. Over FY17 and FY18, we are likely to see a good traction in earnings, due to the pick-up in operating leverage in the economy.

From an investment perspective of 12 – 24 months, should investors avoid defensive sectors?

It would not be prudent to completely ignore the defensives because, for example, FMCG is likely to see volume growth post favourable monsoon which has stoked hope of renewed optimism over domestic consumption.