In an interview to CNBC-TV18's Nimesh Shah, George Joseph, Fund Manager at ICICI Prudential Mgmt spoke about the factors driving the markets and how Indian markets are positioned in comparison to emerging markets.
Below is the transcript of the interview.
Q: What are your views on Indian equity markets?
A: There is lot of liquidity which is driving the markets. If you look at the macroeconomic fundamentals, they are pretty intact for India. Within the emerging markets if you look, India stands out in terms of low interest rates at this point in time. We are at the bottom of the economic cycle and we have a very good macro demographics. So, all this is very supportive from a 3-5 year timeframe. We are very constructive on equity markets?
Q: From a near term point of view are you worried about valuations because all hope of earnings will revive, that has still not played out as what the street was expecting. In that scenario, do you think valuations are looking stretched and there could be a decent correction at least in the near term?
A: If you look from domestic stand point, I don't see any reason why market should correct because the structural factors in terms of physical assets to financial assets, the money is moving very clearly. Even mutual fund inflows are at a record high every month and we see that all other asset classes are also now participating. If you look at gold, even bonds bigger amount of rally has already happened. If you look at real estate, these are the assets from where the money is moving to equities. We think that that is structural and it will continue for many years.
Second part is if you look at from the near term perspective the valuations look stretched from a PE stand point but what we have learnt is that over a long period of time if you look at markets on the cyclical bottoms, you have to look at more to do with price to book.
On a price to book basis markets are reasonably valued and it is like at 2003 levels and that is where we are much more constructive on equity markets on a 3-5 years basis. Near term global uncertainties can change the valuation, change the prices but that is not something which we are concerned about.
Q: I was looking at one of the largest fund that you managed which is the ICICI Prudential Long Equity Fund and interestingly the top three or five stocks largely comes from IT and pharmaceutical. I know you can’t talk about individual stocks, but largely that is where there is too much of negative sentiment towards both these sectors right now, is this a value buy or you think structurally things are changing for them to do well over the next few years?
A: Generally what we do is that as a part of when I look at funds, when I look at markets, there are three parts. You have a defensive basket, you have a domestic cyclical basket, and a global cyclical basket. I am very much in favour of the domestic cyclical basket from three to five years standpoint. However, from near-term point of view, when you look at the valuation of pharmaceutical and IT, it looks pretty attractive, especially IT sector is looking very interesting. If the growth comes back in the sector, as the BFSI segment starts doing well in US, you will see the growth coming back to the sector.
Many other sectors are also out of the woods compared to the last three years like energy is out of the woods and manufacturing has started doing well. Large economies doing well which is North America where all the IT companies are focused on. So, we think that IT sector is a good value buy from a three to five years point of timeframe. So, you need to have the complexion of some export basket in your portfolio, you need to have domestic cyclical in your portfolio and also some global cyclicals in your portfolio.
Q: Looking at your largecap fund and interestingly there are no oil and gas stocks in that portfolio, at least in the top 10 whether it is HPCL, BPCL, IOC , or for that matter Reliance which is rallied pretty hard in the last few months. What is the broad view on that space, I know you can’t talk on stocks but broadly on the oil and gas space you think there is still money to be made or you will be averse of that sector?
A: There are a few stocks what we have in that sector in the portfolio. It might not be in the top 10 but we have exposure. Some of the oil marketing companies which we think there are more legroom for these companies to grow on next three to five years’ timeframe and we like some of the gas utility companies as well because structurally we think these two will do extremely well compared to a pure downstream company or upstream company.
Q: Given that there is going to be consolidation and pricing power is likely to be back for some of these players, is this a good time to bet on the telecoms or you think there is still pain as far as the pricing is concerned for telecom players.A: As a house we believe that telecom is a space you have to be in for the next many years because if you see global counterparts, their market caps are so huge and India being a growing country and where the data is now just started to catch up, we think there is a long way to go for the telecom companies. Structurally we are bullish on telecom companies.