'It is a good time to look at non-US, global equity investing'

"We have been positive on sectors such as power, telecom, and metals & mining for some time now," says Nimesh Shah, managing director and chief executive officer at ICICI Prudential AMC.

As the economy rebounds from the effects of the pandemic-induced lockdown, NIMESH SHAH, managing director and chief executive officer at ICICI Prudential AMC tells Puneet Wadhwa in an interview that investor sentiment should improve going ahead and pave the way for fresh inflows into equity mutual fund schemes. Edited excerpts:

What is your view of how the markets have played out over the last few weeks?

The recent rally is driven by an assortment of positive news coming together. That said, markets may look overvalued on the surface given the excess liquidity that is leading to a price rally in growth stocks. During 1992 – 1994, 2003 – 2008 and 2014-2017, a similar trend had played out. The divergence between growth and value, taken on a calendar year-till-date (CYTD) performance spread basis is the largest ever and exceeds that seen in the run-up to 2000 dotcom bubble. This makes value as a theme relatively attractive to growth. Moreover, the US dollar may depreciate further due to ample liquidity. We believe that value as a theme is better placed than growth.

ICICI Prudential had been positive on cyclicals. What’s your strategy now?

We have been positive on sectors such as power, telecom, and metals & mining for some time now. Many frontline companies in each of these pockets were available at prices below their intrinsic value. As the economy recovers, a number of these companies are poised to do well. We are also positive on banks from a five-year view, since the competition posed by non-banking financial companies has come down significantly and, dust will likely settle over the next six months moratorium-related issues. The other opportunity is to invest in good dividend-paying companies, which are not leveraged at this point in time or even in a mutual fund scheme, which focuses on having a high dividend yield from stable companies.

Can the rally in metals sustain?

Neither the consumer durables nor the auto industry can grow without metals, where most companies are trading at single-digit price-to-earnings (PE) multiples. For nearly a decade, weak demand, weak global prices and restrictive regulatory environment have resulted in weak earnings and stretched balance sheets. This, coupled with easy monetary policy stance of the central banks may create the base for the next commodity upcycle in India.

What could be the fixed-income strategy?

Since the last three years, we have been bullish on fixed income segment. The quantum of rate cuts may come down as compared to what we have seen in past couple of years. Hence, an accrual strategy is best placed. As the longer end of the yield curve remains elevated, the Reserve Bank of India (RBI) may continue to conduct various operations to flatten the yield curve, which may aid in better transmission of rates. As a result, we have added good quality spread assets (AA Corporate Bond) in our select portfolios, to make the most of the higher spread premium at this juncture.

Mutual funds have seen sizeable outflows this year. What is the way forward?

As the economy rebounds from the effects of the pandemic-induced lockdown, the investor sentiment should improve, paving way for fresh inflows into equity mutual fund schemes. Amidst all this, what is positive is that the number of folios opened during November has been higher as compared to October. This clearly indicates that a new set of investors may be making their way into mutual funds, which is an encouraging sign.  

Investors are also looking at foreign markets for diversification. Do you see this trend picking up?

In the last few years, investors have warmed up to investing in developed markets through equity mutual funds. From an investor’s perspective, the target market has largely been US, where technology names are driving the indices to new highs. But relative to domestic equities, the interest has not been sizeable although the past performance of such funds has been very encouraging. Investors should be mindful of the fact that US market is heading to a bubble zone and a correction remains imminent. For the US rally to sustain, growth needs to pick up. It is a good time to look at non-US, global equity investing.