Bullish real estate cycle has just begun: ICICI Prudential AMC CEO Nimesh Shah

Shah believes banking, especially private banking, to be a good bet and doesn’t expect to see any asset quality problems for the next two-three years. Although he expects net interest income (NII) to be under pressure, overall, he expects volume growth to be very helpful for lenders. Edited excerpts of the interview:

What is your assessment of the markets in light of the macroeconomic uncertainties?

It’s all about mean reversion. We don't get excited very fast when things are going well and we don't get disappointed very fast when things are bad. We don't think in terms of calendar years, per se. We think more in terms of business cycles. So, we look at a seven-year cycle in any industry. And cycle-wise, there are a lot of plus points across the country, and a lot of risk factors from the external world.

This continues in 2023. Nothing has changed. There are a lot of opportunities. In the markets, there is also a factor of valuation that you put in. If I put it into perspective, Indian equities have matured a lot, overall.

In fact, 2022 changed our way of thinking. We were always extremely worried as to what will happen when FIIs (foreign institutional investors) are selling.

Though I am managing a mutual fund and I was seeing regular flows, the Indian investor behaved way beyond our expectations, even as $5 billion was sold between October 2021 and June 2022.

If you would have told me in October 2021 that this is what is going to happen for the next nine months, I would have told you that the market would be below 40,000… because $5 billion every month was being sold. But the Indian investor kept on investing. The Indian investor has behaved in a matured manner.

Gone are the days when he would go into a shell when there is a correction. He comes out at every 3, 4, 5 percent correction. The foreigners sold so much, almost Rs 3,10,000 crore in those nine months, but the Indian market fell only 16 percent.

After that, they brought in Rs 60,000 crore, and the market goes back up to the same level where it was. So, on the whole, as far as mutual fund expectations are concerned, we are completely amazed by the Indian investor and his resilience. No longer is there a fear of foreigners selling off suddenly, because we know when foreigners are selling off suddenly, on a 4 percent or 5 percent correction, we know our inflow starts.

There seems to be a consensus that corporate earnings will grow 15-16 percent in 2023. Do you think that would be a driver, going forward? Do you see things differently?

So, I see one thing. The foreign investor, who was 21 percent of the market, is now 18 percent of the market.

There is interest about a fund in the emerging market without geopolitical risks. If 30 percent is China and if people are looking at Asia (ex-China) or emerging market (ex-China), the India exposure, which was 8-9 percent, is 15 percent.

So, it is not a one-day journey, as far as foreigners are concerned. So, while there is a risk of whatever the US Federal Reserve does over the next one year, there is also a geopolitical angle, and India will benefit, and I can clearly say that.

Between the two visits of mine to the US, one in May and one in October, I see the difference in how the US investor is looking at this country. His interest is much more than what it was three years back.

While we can say the economies can work independent of each other, as US interest in India grows and we are already at a lower level on FII investment, there is an opportunity.

What sell-off we saw is because of a sell-off in the broader, emerging markets. But China is not going to be always the way it is. So, as more flows get into emerging markets, there is a theory that it is India or China. But when flows come into emerging markets, China also goes up, as does India. And when flows go out, both China and India will also correct.

With that conviction in India’s growth story, which are the sectors you would pick now? Would you go for something more domestic-oriented or something cyclical… something which is more export-oriented?

As you know, one thing is very clear: the banking industry or the financial services industry is very beautifully placed in terms of expected growth, and also in terms of cleaning up balance sheets. What we had said in 2022, we continue to say in 2023 that as far as the banking space is concerned, since a lot of balance sheet clean-up happened by 2018-19, we are into a beautiful phase.

We have been talking to a lot of CEOs, a lot of NBFCs (non-banking financial companies). You don't see that kind of asset quality problems coming into the banking scenario for the next 2-3 years, and the credit growth in the country is growing. So while NIIs can be under pressure, going forward, volume growth will be very helpful to the banks.

I believe, over the next three years, the banking sector looks like a very good sector to play in. Another thing we like a lot is whatever has not done well in 2022, as you are talking about 2022 versus 2023, we clearly believe in a reversion to mean. If technology has not done well in 2022, we are quite bullish on technology.

It may not do well for the next 3-6 months. But when I talk as a mutual fund CEO, I will always be taking a three-year perspective, whether it is banking, technology, pharma, capital goods industry, or real estate.

I think real estate in this country has come out of a very weak seven- to eight-year cycle. Again, real estate works in a seven- to nine-year cycle. So I think we are at the beginning.

We have just seen one or two years of good real-estate performance. I think it is a phase. We have come up with a real-estate fund also. It does not only invest in real estate, but also in anything related to the sector. I believe that, in this country, looking at where we are placed, whether it is banking, technology, pharma, infra space or anything related to construction, that is real estate. I think those are the sectors to look out for in 2023.

The whole universe of PSU banks has done extremely well in 2022, and you say you prefer sectors that have not done well. Are you saying that private banks will outperform in 2023? And also a word on the midcap IT space.

We have always believed in fundamentally strong companies and a couple of banks in the public sector but where is growth going to come from? When I close my eyes and see a 20-year-old guy sitting in Kanpur, I ask myself where will he be opening his bank account? Will he open his account in a tech-savvy private sector bank or will he open in a tech-savvy government bank? We have always got this view on private sector banks. They have got good opening balance sheets and they have got strong market share growth.

We like to invest in businesses which compete with government organisations. When you're competing with a government organisation, I think those businesses are good businesses in our mind.

So, we like the private sector banks in the country that can raise good deposits. I think the next three years are going to be a war on liabilities for anybody who is in the business of lending. He has to ensure the source of the raw material… What is banking? Ultimately, there are two things. Capacity is decided by capital and capital is immense in the country. From foreign countries also, capital can come in as much as you want. The main shortage in banking would be raw materials. Raw material is nothing but deposits, right? So any bank which has got a strong CASA (current account, savings account) franchise, which can raise deposits, is going to be the winner over the next 3-5 years. The ability to raise CASA will ensure that the NIIs are in a good state.

I am quite bullish on the banking sector. Some of the private sector banks have created a great franchise in the market.

What are your views on valuations right now? We have been trading at a certain amount of premium compared to emerging market peers? It's almost 70 percent compared to the historical average of 40 percent, roughly.

I completely agree with you that India looks relatively expensive. Asia looks much cheaper. Even we are advocating that people should invest in our ICICI Prudential Global Advantage Fund, which invests across Asia, and we invest with our competition funds also. Where there is an Asia fund, there is a Japan fund, and a China fund through Hong Kong.

I think Asia, relative to India, is at a better valuation level and it makes a lot of sense that Indians should also invest there… This opportunity is available now, my window is open.

India has its own advantages but Asia investments, without India, also look good.

So you expect valuations and premiums to continue to be as they are for 2023? Or do you think there could be a change now if there is a slowdown in corporate earnings?

I will look at this from two different angles. What you mentioned was versus the rest of the Asian countries, I agree with you. Are we expensive, compared to the rest of the emerging markets? We are. We are the only country that has given returns over the last 10 years. If you see the last 10 years, there are two or three countries which have given positive returns, and our return has been very good even in dollar terms.

We have given more than 100 percent returns in dollar terms over a 10-year frame. So people like to invest in India. That is why India is available at a premium. Will the premium decrease?

It should because it is not that people are going to take money out of India and put it somewhere else. I believe there is enough money in the world and the other Asian countries will get their inflows this year. That's my belief. So one is valuation vis-à-vis other countries, but there is a valuation within the country. India does not look that expensive.

When you look at our historic average, are we 10-15 percent more expensive than what we were in the last 10 years?

Yes, we are. We are slightly expensive. We are not majorly expensive. We are at a slightly more expensive level than in the past. But in the next two years, we expect a double-digit growth in EPS (earnings per share) also.

How many countries in the world will see EPS growth over the next two-three years?

That is where India has got a great advantage. We have got diversified industries, which the world understands. We are not very heavily loaded towards one industry. We are going through a very good business cycle. We are at the bottom of the business cycle and we can do only better. There are a lot of macro advantages to India as a country. With the flow support we are getting today, there is not much downside to India.

Having said that, 2023 will be a year where it won’t make much difference if you invest in debt or equity. You should not be ignoring debt since interest rates are rising in the country.

My credit risk fund is giving a much better return than what it gave one and a half, two years back. People will start looking at debt also. Two years back, the interest rates were so low that people were talking about TINA (there is no alternative factor) about equity, right?

Today, debt is becoming a very good alternative because interest rates are rising. So over the next three years, I believe debt investments will be back big time. People will invest in debt mutual funds. People should put their money in multi-asset investments. And our investors, we are always telling them that instead of doing so because of the valuation levels that we are at right now, it makes sense to invest over the next 12 months.

Instead of giving us money in equity right now, divide it into 12 parts and do a systematic transfer plan into equity. Put money into one of my debt funds, and, over the next one year, systematically move into equity, then you are averaging out throughout the year, because you know the uncertainties that are there in the market today.