Moneycontrol
Dec 07, 2017 06:23 PM IST | Source: CNBC-TV18

Upbeat on exports, tech, healthcare & telecom for next 3-years: S Naren of ICICI Pru

While the feeling is that of a bull market, in the last six-months the largecap index return is not in commensurate with the mood of the market, said S Naren, ED & CIO, ICICI Prudential AMC.

CNBC TV18 @moneycontrolcom

In continuation of celebrating its birthday week and also the Mutual Fund day CNBC-TV18 spoke to S Naren, ED & CIO, ICICI Prudential AMC. The channel completed 18 years of operations this week.

Giving is outlook on the market and themes to look at, he says for the next three years exports will be a big theme followed by technology and healthcare. The house is also still upbeat on the telecom theme for the next three years as well. It was their big call last year.

Interesting thing to note about the market is that the six-month return of Nifty is just 4 percent, while most people would say it should be in double-digits. So, while the feeling is that of a bull market, in the last six-months the largecap index return is not in commensurate with the mood of the market, says Naren.

When asked for stories he would look at entering at this juncture, he said if one were to look from a scheme point of view, then they have always been in favour of categories like balanced advantage fund. From capitalization point of view, the house has always believed in largecaps, he says but in the last 12-18 months, small and midcaps have been outperforming largecaps continuously.

However, he believes that when the cycle of earnings improve, largecaps have much bigger way to go.

Below is the verbatim transcript of the interview.     

Anuj: What are your thoughts on what has happened off late, I think last time when you were here, you told us you want us that the time is right to maybe shift to hybrid funds and not pure equity funds?

A: From a market point of view, we have believed that while the market is not in end cycle, the valuations and sentiment indicators were no longer very attractive. From that point of view, we would want more volatility and luckily there has been a bout of volatility in the recent past. What was very interesting to me is that the six month return in Nifty is just 4 percent and if you asked, most people in the market, they would tell you that the six month return should be double digit. So, while the feeling is that of a bull market, the last six months largecap index return is not in commensurate with the mood of the market.

Latha: Just to come back to the point you were raising that we touched 10,000 on July 26 and if you look at it from that point, clearly not too much of gains have been notched up. However, at this moment where would you enter then, is it a churn, is it say a movement from non banking financial companies (NBFCs) to public sector banks or something like that that you recommend?

A: If I look at it from a scheme point of view, we have always been in favour of categories like balanced advantage fund for quite some time now. From a capitalisation point of view, we have always believed in largecaps, but as you know, the last one-one-and-a-half year, while we have believed in largecaps over midcaps and smallcaps, continuously mid and smallcaps have been outperforming largecaps. So, that is the reality and I would still tend to believe that when the cycle for earnings improves, I think largecaps have a much bigger way to go.

Part of the reason for midcaps doing well is that while the local investors have been very exuberant, the foreign investors have hardly been exuberant in 2017. If you look at flows in 2017, they are very small compared to what we used to see in 2010-2013. So we still believe in largecaps, and we still think that if people have to invest for the long term, you either choose a category like balanced advantage fund or a theme like largecaps at this point of time. This has been our consistent view and I would say while the volatility part has been working recently, I don’t think the largecap versus midcap and smallcap has been.

Sonia: I want your views on debt as well because I was reading one of your recent interviews where you said that you are quite worried about how investors are only looking at equities and as though there is no other asset class to invest into? Would that mean that you would recommend investing in debt funds as well in 2018?

A: What worries me at this point of time is that having been in equities for 28 years, I have seen downs in the market. Eighty percent of mutual fund investors have not seen a 10 percent correction in equities. So they consequently think equities as an asset class will either give plus 10 or plus 7 or plus 4 because they have not seen 2011 or 2008 or earlier bear markets. So my thesis has been that investors should not invest in debt for the sake of debt returns. I do not think there is a big return expected from debt funds, if you invest today but there is a necessity to invest in debt because it is certainly a much more capital protection product compared to equity and the reason for investing in debt funds is not return but capital protection because you are not likely to see minus 10 or minus 15 in debt. So at the most you will get lower returns but not negative returns over medium period of time. So what we have been trying to tell people that you either invest in equity and debt funds individually or you invest in a category like balanced advantage fund because debt doesn't appear bubblish, in fact no one is interested in debt fund at this point of time whereas in equity the kind of flows as most of you know, I do not think anyone would have expected that the local mutual fund industry will get Rs 20,000 crore per month which is the current run rate which shows that local investors are exuberant in equities and lukewarm towards debt.

Anuj: Getting back to equities. Last year your big call was telecom. You are a contra buyer and we have seen a huge rally in Bharti Airtel. Are you still playing that theme?

A: We are big believers in that theme for the next three years because in my opinion most people in this generation do not care whether they hold a purse; they are happy as long as they have a mobile phone with them. So consequently I believe that telecom as a sector is a very good sector to own. Having said that is the sector as cheap as it was one year back, is there fear in the sector as it was one year back. The answer is no because the few consolidated players, people are very confident about and so it is no longer a big contrarian play. Is it a structural play for the next three-five years? I seem to think so.

Latha: Give me a monosyllabic answer - what is the next contrarian bet?

A: I think people tend to believe that we can create a big boom only out of consumption. My view is that I do not know whether there is 2018 call but over the next three years exports has to be a good theme because you cannot keep buying mobile phones without an export story also. So my bet is exports lead by technology and healthcare but I am not too sure whether it is a one year call or a three year call.
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