Market rally in 2021 to be much more broad-based: ICICI Pru AMC's S Naren

Global central banks are driving stock markets worldwide, including India, and there’s reason to be positive on equities until such time as inflation returns in the developed world, says S NAREN, executive director and chief investment officer, ICICI Prudential AMC. In an interview with Ashley Coutinho, he says current valuations are not very expensive, especially when viewed in the context of low interest rates. Edited excerpts:

What is your outlook for Indian equities this year?

We are of the view that the Indian equity market is in the midst of a bull market, driven by central banks of the developed world. We are positive on equities, in general, till inflation makes a comeback in the western world. When that happens, central banks, especially the US Fed, is likely to withdraw liquidity support, which has been the cause of the current rally. We don’t see this happening anytime soon, at least not in the next six months. For those averse to market volatility, the optimal approach is to invest through dynamically managed asset allocation schemes.

What are your thoughts on market valuation?

On a standalone basis, equity valuation is expensive. However, when viewed in the context of interest rates, which are very low, market valuation is not very expensive. It is because of this reason that the key to how the rally unfolds in the times ahead lies with central banks of the developed world.

In this market, are there any pockets of value?

Even after the market rally, there are pockets of value for a discerning investor. Sectors such as metals, corporate banks, infrastructure, and real estate continue to offer value. Some of these sectors have been underperformers since 2008. In effect, the sectors that did well from 2002 to 2007 are the ones that look much more attractive today than those that did good between 2008 and 2020.

What is your view on banks and non-banking financial companies (NBFCs)?

We are positive on corporate banks and NBFCs, especially those that are focused on loans for commercial vehicles and homes. We believe these will be out of the woods first, followed by others that are facing issues related to non-performing loans.

Your thoughts on the mid- and small-cap space. Do you think the rally will become broader now?

The market rally this year is likely to be much more broad-based. The outlook on the sectors that have not participated thus far too has improved and hence their participation in the market is likely to improve. Market polarisation, which has been the case till October last year, has reduced and we believe the process will continue.

When interest rates are low, small- and mid-cap companies stand to benefit. In the quarters ahead, it is probable that the profitability of fundamentally strong companies in the broader markets will impr­ove. This is likely to set the stage for a rally in the mid- and small-cap space. So, if an investor is ready to stay put for the next five years, one can consider investing in mid- and small-cap funds, but through systematic investment plans (SIPs).

The start of 2020 saw investors flee debt funds because their confidence ebbed due to certain events. What approach do you recommend for 2021?

Investors in debt mutual funds of ICICI Prudential were not affected by any of the adverse incidents. We are comforted by the returns our funds have delivered. Further, for 22 years of ICICI Prudential MF’s existence, we haven’t faced any default in our debt holdings.

In CY2020, the Reserve Bank of India cut rates by 115 basis points. This was coupled with various measures to support growth and also ease the liquidity situation. We assign low probability for rate cuts due to change in growth and inflation dynamics. AA corporate bond yields spread over the repo continue to remain high, offering a high margin of safety. Due to the flight to safety, the transmission of rates happened more in the extreme short end and in the AAA space. However, in the AA space, rate transmission remains muted, providing an opportunity to invest. We had been recommending debt for a long time. A combination of arbitrage funds, accrual funds, and dynamic asset allocation funds may prove to be a better way of investing in debt.

What is your take on domestic institutional investor flows? Do you see that improving?

Investors spooked by the sharp market correction in March have turned cautious and booked profits, due to which we have seen outflows from equity mutual funds. This trend is likely to reverse soon. The interesting point to note here is that while the inflows through SIPs may have reduced, the number of new SIP accounts has seen a healthy addition. 

The number of SIP accounts has increased from 33.7 million in October to 34 million in November last year.

What is your take on the underperformance of large-cap funds vis-a-vis their benchmarks over the past few years?

In an extremely polarised market, which was the case with Indian equities for the past 24 months, outperforming the benchmark was a challenge. However, now, as the market rally becomes more broad-based, this trend will likely change.

Any thoughts on passive investing?

In a market such as India, there is room for growth for both active and passive strategies. However, for active to perform well, we require a less polarised market than what has been the case over the past couple of years.