We are cautious now, markets are fully valued: S Naren of ICICI Pru AMC

Rising crude oil prices, sliding rupee and the crisis at IL&FS have kept the markets on tenterhooks since the past few weeks. S Naren, executive director & chief investment officer (CIO), ICICI Prudential AMC tells Puneet Wadhwa that on a valuation basis, large-caps continue to remain attractive over mid/small-caps. Edited excerpts:

What is your reading of how the markets have performed over the past few weeks? Are you facing redemption pressures in any of your schemes?

Besides the rise in crude oil prices and rupee depreciation, from a global environment standpoint, interest rates too are rising. Case in point is the recent hike in rate by the US Federal Reserve. There are also talks about the European Central Bank (ECB) possibly hiking rates in near future. Regarding IL&FS, we have no exposure to the group. We are not facing redemption pressure in any of our equity schemes. In debt schemes, redemptions are usually seen in September quarter-end.

Do you see more downside for markets in the next 6-12 months?

We are of the view that the market is fully valued. Uncertainties such as developments in domestic financial market, depreciating rupee, higher crude oil prices and widening fiscal deficit are all factors that could play spoilsport. On a valuation basis, large caps continue to remain attractive over mid/small-caps. However, if an investor is ready to stay invested for next five-ten years, then one can consider doing SIP in mid-and small-cap funds. Outflows from emerging markets could be a reality, and India will not be immune to it either. 

What has been your investment strategy amid the recent market fall? 

We are cautious as we believe the markets are fully valued. From a market capitalisation perspective, large-caps are better placed than mid-and small-caps. The market reaction, we believe, is largely taking into cognizance the asset quality challenges, stretched valuations and the likely liquidity squeeze post the recent events.   

As an investing strategy, what is the debt-equity split you recommend to investors now?

We have been recommending investors to invest into funds such a dynamic asset allocation / balanced advantage category of funds, where the amount invested is spread across equity and debt asset classes, based on market valuations. Our fund in this category, as of August 31, 2018 has net equity level of 30.13 per cent, reflecting our cautious stance. When it comes to debt funds, one can consider investing in credit risk and ultra-short term funds. 

Your sector preferences? 

Despite the trade war issues, the global economy remains strong. China, too, has been rational with its step towards addressing excess capacity. Keeping in view this stance, we are positive on non-ferrous metals. We are positive on exports (information technology, pharma) and manufacturing theme, power and strong deposit-taking banks. 

Mutual funds have been net buyers in the equity segment thus far in calendar year 2018 (CY18) though the monthly quantum has been declining since the past few months. What is the road ahead? 

As of August 2018, the industry systematic investment plan (SIP) book stands at Rs 7,658 crore. In calendar year 2017 (CY17), there was increased inflow into small-and mid-cap funds, at a time when we were recommending investors to opt for large-cap funds given the attractive valuation at which the names were available at. Further, in January 2018, our PMS division shut two of its small-cap schemes, returning over Rs 700 crore to its investors as valuation, we believe, were stretched. 

Our investment calls over the last several months which include investing in large-caps, balanced advantage schemes and select themes such as pharma / healthcare and export-oriented have worked well. 

How do you think the Reserve Bank of India (RBI) will respond to the developments while reviewing its monetary policy later this week? 

We expect a rate hike in the October policy given the possibility of fiscal slippages at the centre or state level. It is likely that the RBI will be guided largely by the inflation print, keeping in view the continued volatility in oil prices, development in global markets.

How concerned are you as regards the developing global scenario – US Fed rate hike plans, Brexit, rise in bond yields and oil prices? 

Of these, rise in oil price is a major concern. In terms of US Fed rate hike, there could be increased pressure on emerging markets, but otherwise, it’s not much of a concern. Per se, we don’t expect the US Fed rate step to derail US or the global economy. 

ICICI Prudential Manufacture in India NFO is underway. Could you please describe the rationale behind launching such a fund? 

Over last 4 decades, the share of manufacturing in India’s GDP has stayed in a narrow range of 14-16 per cent. It recently moved out of this range to 18 per cent and the government aims to take it to 25 per cent of gross domestic product (GDP) by 2025. Under this Fund, we are looking at manufacturing in export-oriented sectors, domestic capex and domestic consumption. Manufacturing in India will not only help generate large-scale employment but also reduce forex outflow owing to import substitution.