In the backdrop of sharp market volatility, Manish Gunwani, senior fund manager, ICICI Prudential AMC, talks to Chandan Kishore Kant on market trends and the outlook on select sectors. Edited excerpts:
The markets had a good run from late 2013 till this year's Budget. Do you expect a similar uptrend soon?
The overall market is valued at close to their long-term average price to earnings multiple. It is likely to progress broadly in line with earnings growth. The phase from the second half of 2013 to the Budget this year was largely driven by valuation normalisation of a lot of stocks, especially in the mid-cap to small-cap space, which had under-performed in 2011-13. Hence, the returns during this phase were higher.
We are hopeful of an earnings recovery, given the country's healthy macro situation of the country, though it is unlikely to be V-shaped; this could lead to a steady, compounding market.
How big an impact do you see from events such as the Bihar elections or the US Federal Reserve meet?
While such events are important from the market perspective in the short term, these are very difficult to predict. Ultimately, what will drive stocks are the fundamentals in terms of business model, management quality and valuations. Our portfolios are largely following a bottom-up strategy.
The earnings season is on. Your assessment so far?
The started with muted expectations and, to that extent so far, has shaped reasonably well. We are seeing a fair amount of companies being able to expand their margins, leveraging lower commodity prices and other cost control measures.
Which sectors or themes do you see as a good opportunity?
If you look from a three to five-year perspective, defensive sectors like fast moving consumer goods, information technology and pharmaceuticals have outperformed the cyclical sectors. So, from a historical valuation perspective, the cyclicals are cheaper. However, it is likely the valuation gap would narrow only if an economic recovery drives the earnings growth of cyclicals. As long as cyclicals' earnings are suppressed due to a soft economy, both global and domestic, the defensive sectors are likely to attract investor attention.
