Risk-reward is still favourable for the long-term: ICICI Pru Life Insurance

Nifty's earnings are in high teens and this premium growth merits higher valuations, says Manish Kumar, CIO of ICICI Prudential Life Insurance.

It has been a choppy first half of fiscal 2022-23 (FY23) for the markets. MANISH KUMAR, chief investment officer, ICICI Prudential Life Insurance, tells Puneet Wadhwa in an interview that from a near-term perspective, mid and small-caps valuations in some pockets are much ahead of fundamental performance and could be prone to correction. Edited excerpts:

Are the markets ripe for more fall?

The Indian markets offer better growth prospects as compared to the global peers. The earnings outlook, too, remains resilient, with returns in the mid-teens expected from the Nifty for the next couple of years. However, the Nifty valuations are at a premium. Therefore, one should expect returns in line with earnings per share (EPS) growth going forward. High-frequency indicators, such as goods and service tax (GST) collections and credit growth, continue to be supportive and suggest a broad-based recovery. While the markets can trade sideways in the near-term given the global risks, the risk-reward is still favourable for the long-term.

What about the mid-and small-caps?

Investors with a long-term view i.e. five – seven years can benefit from these segments. The near-term volatility should be used as an opportunity to invest in quality companies. This universe offers investors a multitude of sectors to invest in. Many of these sectors cater to the domestic consumption needs, or are geared towards capturing the supply chain shifts happening globally. The runway for growth for many of these sectors is much better than it was three – five years ago. However, from a near-term perspective, mid and small-caps valuations in some pockets are much ahead of the fundamental performance and could be prone to correction.

How comfortable are you with the valuations at this stage? 

Nifty’s earnings are in high teens and this premium growth merits higher valuations. Analysts across Asia have become more cautious in making further cuts to their estimates. Despite the increasing cost of capital, we expect earnings upgrades only for select domestic consumption and cyclical names over the next six months, led by a correction in raw material prices and lower crude prices. In the last three years, the Nifty 50 EPS compounded annually at 19 per cent is currently trading at 18.5x P/E (one-year forward), which is 10 per cent ahead of the last 10-year average P/E. The recent correction in the Nifty is largely due to the rise in yields globally.

Your sector preference?

We are cautious on export-oriented sectors & global cyclicals, while financials and domestic consumption sectors offer good investment opportunities. We believe select information technology (IT) stocks have corrected recently and baking in developed markets’ recession fears. These stocks can be viewed as value picks. Select consumption stocks, too, will benefit from improved demand and raw material tailwinds. We are positive on the Capex cycle recovery themes, including real estate.

What is the road ahead for flows into the equity market?

Markets are dependent on earnings growth, and as India demonstrates better prospects as compared to its various peers, we expect a gradual reversal in flows. Also, domestic retail flows are a structural force, i.e. retail flows into equities both directly and through unit-linked insurance plans (ULIPs) and other savings instruments, will continue to support the overall market.