Investors across the world and in India have been underweight on equities for a long period of time, and now they are witnessing this continuous rally, says S Naren CIO - equities and fixed income, ICICI Prudential AMC.
Talking to CNBC-TV18, he says said he would advise people to invest gradually in companies or sectors which benefit out of volatility and look long-term.
In the pharmaceuticals sector, valuations are no longer cheap, and over the last six to seven years they have re-rated pretty significantly. He says. So, periodic corrections are likely at this stage as valuations are no longer as compelling as they used to be.
But if the dollar keeps appreciating, this is one of the sectors which is likely to benefit in a strong dollar environment. So, in the next two, three years the sector outlook seems reasonablly good.
Here is the edited transcript of his interview with CNBC-TV18
Q: At 20,200 on the Sensex, what are you advising investors to do? Have they missed the bus or is there still some more opportunity to buy at these levels?
A: Investors across the world and in India have been underweight on equities for a long period of time and they are seeing this continuous rally in equities. So I think the challenge for investors at this point of time is that there are two events in India which are likely to happen in the course of the next one year. One is the election and second is at some stage FED has to consider policies of tightening.
Barring these two triggers, how they will play out we are in a situation where people should still consider equities and there is a challenge because they are mostly under-invested. So, we are telling people to invest gradually, in products which benefit out of volatility and look long-term because they are anyway massively under-invested at this point of time.
Q: What is happening with pharmaceuticals today, what is your call as a house on pharmaceuticals and in particular any of the stocks that you would possibly have a buy on dips strategy on?
A: We have been overweight now for about six, seven years now and the only thing is right now as we speak, the valuations are no longer cheap. Slowly over the last six to seven years they have re-rated pretty significantly. So, periodic corrections are likely at this stage because the valuations are no longer as compelling as they used to be.
Having said that if you think about a scenario where dollar keeps appreciating, this is one of the sectors which is likely to benefit in a strong dollar environment although it doesn’t get necessarily any benefit out of lower interest rate. So, if I still take the next two, three years it seems to be a reasonable sector but big money making is not easy any longer.
Q: Where is the big money to be made? Are you seeing any kind of sectoral churning – is the bias moving out of banks and into perhaps other sectors because we are seeing autos moved quite well today, IT in general has made a bounce back – if you had to put your money now, where would you put it?
A: Our view in the last six months has been same that except a few consumer stables and a few other stocks from other sectors which are not cheap I think but the rest of the market has always been reasonably priced in the last six months. Finally, we are seeing some rotation.
For example, on Friday we had a good move in capital goods stocks. Today, we are seeing good moves in some of the auto names. I think those rotations have to continue because one has a situation wherein some of the stable names one is trading at more than 35 times trailing and whereas most of the other sectors are trading at much lower and the aggregate itself is just about 15-16 times.
There is a lot of scope for rotation. The rotation is likely to continue as long as the good government policies have been followed like the increase in diesel price which is reduced, oil subsidy and steps like keeping a good tab on fiscal deficit. All these steps are actually helping this rotation to happen because there is no need for people to park their money irrespective of valuation in many of the stable names.
I think globally there is a possible trend out of the stable names or what one of the strategist called today- growth at unlimited price. I think that kind of strategy, I don’t think can continue for too long.
Q: We also have a lot of supply coming into the markets in terms of say the Just Dial initial public offering (IPO) and then there is a possible divestment calendar in terms of the likelihood of maybe a Coal India coming through in the next couple of months. Do you think that there would be just some amount of shift of interest from the equity space back to primary paper and what would your call be particularly on something like Just Dial?
A: I don’t speak on specific stocks but definitely it will slowdown the rally but at the same time as long as IPOs or the paper which is coming is of good quality it is pretty healthy for the market. Through the last two years we have seen primarily decent quality paper coming into the market and they have all been helpful. It will reduce absolute return in indices but as long as money is invested in good quality stocks all these divestments and many of the offer for sale (OFSs) are all pretty attractive actually for investment.
Q: What could the range for the market be for the next couple of months do you think we are pushing at new highs on the upside or is there a potential of a scale back after the big run that we have seen?
A: I think it is very tough call to say. What we have seen in recent past has been that every year July to September has been good for markets with the exception of 2011. Having said that, today two factors which matter as I said, In the next one year one, is what happens in politics and what happens in US Fed. These are the two things which matter. No one can predict timing of the US Fed tightening. If that was not to happen during summer I think there is scope for the markets to go up further.
Whereas if tightening by the US Fed happens in the next three months how the markets will react is going to be a trillion dollar question across the world. That is I guess one of the most important events for the next one year. It is very difficult to give a range. On valuation, markets have been reasonable except those 10-12 stocks which don’t appear to be cheap, I think the rest of it is cheap – at least 10-12 stocks are possibly some of the best companies in India so their premium valuation is a function of reluctance by the investors to go down the quality and if the market rallies the rest should rally not these 10-12 stocks.
Q: Just a quick word on the rupee and what sort of impact do you think that it has in terms of sentiment on the capital markets because both those assets classes are moving in completely divergent trends?
A: People are focused on the rupee, I think people have to get focused on the dollar index. If you see the dollar index, dollar index has been just going up. This year whatever move we have seen in the rupee, in the last two months, is part of a strong dollar move rather than anything to do with rupee.
Clearly between all the big economies in the world the market knows that it is the US which needs to increase or tighten monetary policy and therefore the money does go from other global developed markets to US and that is causing this big move in dollar index. It is more the move in the dollar index rather than the move in the rupee. In fact the rupee must have appreciated against most of the other currencies except the dollar.