The recent pullback across emerging markets has more to do with the bounce in crude prices, says Manish Gunwani, Deputy CIO-Equity at ICICI Prudential AMC.
He expects cyclical and commodity stocks to lead the recovery globally.
Gunwani prefers large cap plays over midcap stocks in the coming 2-3 quarters.
In an interview with CNBC-TV18, he said that oil, gas and realty reforms though delayed, bode well for these sectors
He is not upbeat on the IT sector as he feels the sector is maturing and does not expect high earnings growth in the near term.
Below is the transcript of Manish Gunwani’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV-18.
Sonia: What is the sense you are getting about the pull back that we are seeing and do you think it has more legs to go?
A: A lot of it is global, because if you see what has happened in the last couple of weeks, in general, we have seen emerging markets rebound quite a lot, in fact led by the commodity producing markets like Brazil, etc. So, a lot of the movement is global and we mentioned this the last time as well, that this whole paradigm of dollar, if it weakens then typically emerging market currencies and commodities tend to do well. So, what is happening recently is that kind of paradigm playing out where if you see a lot of emerging market currencies, they have appreciated materially because oil has come back.
So, that high correlation between stock market and oil is a big factor nowadays and till oil reaches a point where the global macro stability kind of concerns fade away, whether it is yuan depreciation, whether it is Brazil, whether it is Saudi Arabia, if we reach that point, which to my mind is somewhere in that 45-55 kind of range, if oil kind of proceeds slowly towards that, we should pretty healthy emerging markets. And as a consequence, India should do pretty okay.
Latha: So, where would you place your bets in this impending rally that you are expecting?
A: Definitely, if we are looking at a commodities rebound – metals, commodity stocks and also some of the Indian cyclicals which either had direct exposure to some of the commodity producing countries or as a consequence of commodity prices coming off, suffered due to certain nuances of the business model, they will definitely lead the rebound. And that is again what is happening. So, in general, both global and domestic cyclicals to my mind will lead the rally till this whole commodity complex moves up.
Sonia: I was going through you funds and the largest fund that you manage, the focused bluechip fund has a big exposure to banks and two of your biggest holdings over there, ICICI Bank and Axis Bank have come off substantially from their tops in the last three to six months. Do you think the worst is over for some of these private sector banks?
A: I think you can divide it into two parts. As I said, what has happened over the last two to three quarters is the severe commodity deflation has led to a lot of asset quality concerns in those kind of sectors which are very capital intensive, let us say metals.
Now, that obviously again, if we see the commodity complex rebound should fade away a bit. Coming to the domestic side, we had this RBI exercise where the reported non-performing loans (NPL) went up a bit. To my mind, generally, the market was aware about a lot of these events and the impact on reported profit sometimes can affect a stock negatively a bit.
But when we look at the long-term, some of these banks do have good retail franchise, both on the liability side and on the asset side. And, as of now, we are not seeing any impairment on the retail asset quality front. So, as long as these banks continue to grow their current and savings account ratio (CASA), they continue to grow their retail books, we should be pretty fine.
Latha: What is your sense about the oil and gas reforms that were announced if you could call them reforms? Is that making you bullish on that sector at all?
A: They are very good reforms. Only things is, tragically, they have come at a wrong time in the sense that commodity prices are such that it may not spark off an immediate revival in the capital expenditure (Capex) there.
But, these reforms, like the oil and gas bill as well as the real estate bill, they definitely mean that it is easier to do business, there is more fairness between the stakeholders of the sectors. So, I do think that these reforms in the long-term will help the economy a lot because these are very large sectors – oil and gas, real estate, etc. and therefore, whatever makes them do well will benefit the economy a lot.
Sonia: Talking a little bit about the other exposures that you have, a big holding is in the IT space. So, in both your funds, you have names like HCL Tech and Infosys, especially in your focused bluechip fund. Does it make sense to increase exposure to any of these names, because Infosys, we have seen has gone from Rs 1,000 to about Rs 1,200 in the last 3-4 months, so does it make sense for an investor to increase exposure to these top-tier IT names?
A: In general, the way we view the sector is that it is a defensive sector in the sense that obviously, you have companies with good balance sheet, good cash flow, the dividend yields are pretty healthy versus the rest of the market. But, do we see them as very high growth companies growing in the future? I do not think so, because it is already a sector which is 100 billion plus and therefore, there is a sense of maturity in the sector where the best guys is growing at 12 percent, the worst guy is growing at 6-7 percent. And, if you look on a fairly long-term basis, what is happening is that the industry growth rate is tending to come down, every two three years. And from whatever indications we get, that is likely to continue.
What has happened over the last three to five years is of course, that we have generally been in a strong dollar market globally. So, a lot of export sectors including IT have benefitted from the currency tailwinds. And going forward, today these stocks, the valuations are attractive, but we need to be a bit more stock specific because if the industry itself is not going to row gang-busters, you probably need to be in stocks which can get market share because the companies which are growing below industry growth rates will tend to have very low growth rates.
Latha: Would midcaps be the better performers this year? Would you look at those nuggets, the home improvement or the auto ancillary or something like that? Is that going to give you better than the Sensex and the Nifty in terms of returns?
A: In general, we think largecaps are a bit better at this point of time, basically for two reasons, one is, if you look on long-term valuations, the price-earnings or the price to book of the midcap index versus the largecap index is at an extreme level. So we do think there is a good chance of valuations converging and because of that reason, largecaps catching up a bit.
The second reason is also that if we are going to see a rebound in the markets led by global factors, what does tend to happen is the largecaps tend to have larger exposure to the global economy than midcaps. So, what you might find is that because of better global growth, better commodity prices, a lot of largecaps have more exposure to these trends than midcaps.
Having said that, of course, midcap is a very bottomup segment, so maybe you can always find stocks which interest you. But on a very broad brush basis, we do think for the next two to three quarters, largecaps are better.