Feb 11, 2016, 05.39 PM | Source: CNBC-TV18
S Naren, CIO of ICICI Prudential AMC, says this year is not for traders but for long term investors, particularly from mutual fund point of view.
Sharp triggers from European markets on Thursday pulled Sensex below 23,000 for the first time after May 9 2014, bringing Indian volatility to five months high. However, Indian equity market could recover if the conditions improve globally and if that doesn't happen, market will provide massive buying opportunity, says S Naren, CIO of ICICI Prudential AMC.
In an interview to CNBC-TV18, Naren says this year is not for traders but for long term investors, particularly from mutual fund point of view. Further, he advises investors to invest throughout the year and to remain marginally overweight on equity.
Meanwhile, according to him, factors that could save markets from bleeding include a trigger from the Federal Reserve and a rise in oil prices. However, he believes the latter would not happen before a year-18 months.
On the earnings front, he believes bad loans showing in this year's corporate result were the ones initiated in the year 2007- 2010 and if one does not invest now, chances are one could miss the bull market.
On the public sector unit (PSU) banks, he says investors should pick stocks systematically throughout the year after considering leverage and model of the banks and believes banking is likely to bottom out going forward.
Below is the transcript of S Naren\\'s interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Anuj: You handle one of the largest mutual funds. Tell us, what is the retail sentiment? Have you started to see redemption pressure? Have you started to see slowdown in flows?
A: Clearly in the month of January, there has been a fairly decent slowdown in flows. However, having said that, we think that 2016 is a very good opportunity for investing in equity. Such an opportunity presents itself once in three to four years. The last time it was in 2008 and 2011. You are again getting that opportunity.
Our view has been that invest in equity in 2016 and in case there is nothing happening in India which is responsible for this in our opinion, so as and when we have a situation whereby the global situation improves, the market should recover. If a negative global event happens which we don’t expect, but if it were to happen, that would be a massive buying opportunity. So, investors should use this opportunity.
As we have said in our earlier interactions, 2016 is not a year for traders, it is a year for long-term investors. Traders have to be exceptionally careful in 2016 because the market will be very volatile during this period. So, as long as you are a long-term investors, 2016 is an opportunity. If you are a trader, 2016 is like electric current.
Sonia: I heard you say that this is a great opportunity, an opportunity that you don’t get and an opportunity you haven’t got in last many years but who is to say that this market doesn’t fall further? I mean what gives you that confidence that this situation is not the same or may be even worse than 2008?
A: I repeat that it is this year which is an opportunity. No one knows whether today is the bottom or not. Our view was that January 2016 when the market corrected was the first opportunity again it is coming in February this year. I believe that you have to spread your investments through the year. Only in retrospect you will know when the market bottomed out. We believe that investors have to spread their investments through the year .
Our view has been that people should be marginally over weight in equity and increase their investment each month in equities and end up with a substantial over weight positions in equity by the end of the year. I believe if you look at the traders, that is why I would say it is the traders who determine what the bottom of the market would be because they are the people who act in options in a big way etc. So, as long as I am a mutual fund I can see that this year is a wonderful year to collect money for some investors in the long-term and you don’t get such years.
Having said that if the people are going to ask me what is the bottom frankly no one knows because the bottom is set by the marginal seller who is not looking at fundamental. If I had asked any of you 18 months back what will be the prices oil I don’t think anyone would have given you a number of USD 28 per barrel for Brent. So, it did come to USD 28 per barrel because it is that marginal seller in oil who is bringing the price down to USD 28 per barrel.
So, like that markets will be determined by the marginal seller in a market bottom and a marginal buyer in a market top. Clearly, this year will be volatile and that is why we always have been telling people, this year people should refrain from trading. Use mutual funds to invest through daily systematic investment plan (SIP), weekly SIP, monthly SIP, weekly systematic transfer plan (STP), etc.
Anuj: The question I was asking was what is the trigger for this market to go up, because globally we have seen this big mayhem and even in our local cues, we have not seen earnings pick up. That has been the big problem for the last 18 months or so.
A: Our view that that trigger is going to come mostly from the Fed and we have had a situation whereby the Fed has now still committed itself to interest rate hikes and I believe that the Fed actually monetary loosening would actually be a good positive for all global markets. The second would be oil going up, but oil going up is not going to happen overnight, it would happen in our opinion a year to 18 months, so I would say that that would be the second trigger.
The third is that you have a complete capitulation where every bull throws in the towel, then you automatically have a rally because there is no bull left, all are bears and then through the bear covering itself, you have a rally. I would not want that kind of a situation. So, that is the reason our view has been standard that this is not an easy year for traders because you cannot predict the date so it is going to leave, or the day oil is going to go up and stabilise at a much higher level. It is much easier to believe that you will have to spread your investment over the year for long-term returns and this is a year where traders should actually stay away from trading, because the past experience of the traders in years like 2008 or 2011 have not been good. So, I would say it is the investors in 2008 and investors in 2011 who have benefitted, who invested in mutual funds in those years.
So, again this year it is only the investor in a mutual fund who is likely to benefit who is investing through the year, not the trader. The trader is going to have too many, almost like a day like today can be a heart attack for a bull, a trader. So, I would say that I would be very careful with a trading mentality, but I think this is still a fantastic year for long-term investing in equity.
Sonia: My only argument with that theory that you pointed out is that the genesis of every bull market or every market recovery generally is a recovery in earnings and if you see the country’s largest bank, State Bank of India (SBI) posting slippages of more than Rs 20,000 crore, you shudder to think what the state of the other banks will be in the quarters to come. So, my question is how long will one have to wait for earnings recovery to play out?
A: I think you have to remember that most of the problems happened in the market out of loans which have been given in 2007. So, frankly, if you look at the earnings drop in 2016, it is for the loans that have been given by the banking system in 2007 or 2010, not in 2016. In 2007, the same companies when they were given loans, the stock markets actually benefitted by looking at their loan growth or net interest margin, etc.
So, equity market is a funny market where the year where the problems are maximum, like this year is the year to invest and the year like 2007 when everything looked gung-ho was the year to disinvest. So, I believe that we are clearly in a year of investing in equity and if you are going to wait for earnings to come, you want to wait for all the bank earnings to come, you want to wait for the NPL problems to get over then you are going to miss the bull market. You would have been investing then in the middle of a big roaring bull market.
So, our view is that equity as an asset class itself has to be invested in distress and sold when things are good. You know that what Warren Buffett says, the best opportunity to invest in equity market comes in fear and the worst opportunity to invest comes in greed. So, I think when there is fear like today, people forget the sayings of the big gurus of investing who are clearly telling you that 2016 is a year to invest and not a year to worry about what is happening everyday in the market or everyday in the newspapers because you are not going to have good headlines in 2016. All your good headlines were in 2007.
Sonia: As they say you should buy when there is blood on the street and there is clearly a lot of blood on the street would you buy PSU banks now?
A: Our definition of risk comes from one factor what is the leverage of a company, what is the business model of the company and these are two factors which we look at and what is the kind of earnings support that you have at this point of time. From that point of view we have actually recommended investing in banking fund strictly on a systematic investment plan basis for the current year. We think that this is the year banking is likely to bottom out given all the concerns that are been talked about every day from morning to evening in every corporate results that you have seen in banking.
So, we have been recommending investing through a systematic investment plan in banking fund for the first time this year because we see that culmination of all the problems of misallocation of capital of 2007 is happening in 2016. The year where the culmination happens is the year to invest in banking stock having said that, this is not a sector to invest on a lump sum basis because it is going to be exceptionally volatile. We think that this is the kind of sector to invest in through the year everyday possibly.
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