Rajat Chandak, Senior Fund Manager, ICICI Prudential AMC, says that it is difficult to predict what could transpire in the short term, we believe autos is one pocket that could surprise positively over the next 12 months.
Chandak has a rich experience of more than 13 years and manages several schemes such as ICICI Prudential Multicap Fund, ICICI Prudential Bharat Consumption Fund, and ICICI Prudential Regular Savings Fund.
In an interview with Moneycontrol's Kshitij Anand, Chandak says if inflation rises beyond the comfort zone, it could lead to higher interest rates/yields which could cause a speed bump in the recovery cycle.
Q) Bulls remain in control of D-Street and every dip is getting bought into. What is your outlook on markets for the year 2021?
A) We are the view that for the rest of 2021 Indian equities could see spurts of volatility from time to time. Equity valuations, in general, have become rich as concerns around the surge in Covid cases is tapering while the vaccination drive pan India is gathering pace.
Also, on a cyclical basis, both economy and markets look well poised from a 3-4 year perspective, a time when business cycle recovery could play out. Hence, we are optimistic about equities from a medium-to-long-term standpoint.
Q) Any contra trade with respect to sectors which you think could play in the next 6-12 months?
A) While it is difficult to predict what could transpire in the short term, we believe autos is one pocket that could surprise positively over the next 12 months.
Currently, this is one sector that is under pressure from all fronts, be it demand, supply, and profitability. This could change for the better in the time horizon we are talking.
Q) Which are the key risks the Indian market faces amid the Bull Run?
A) One of the key risks which could play spoilsport is rising inflation. This is despite the understanding that some amount of inflation tends to be good for equities as an asset class, as it supports nominal growth in GDP as well as corporate earnings.
But, if inflation rises beyond the comfort zone, it could lead to higher interest rates/yields which could cause a speed bump in the recovery cycle.
However, at this point, global central banks seem to be temporarily much more tolerant to higher levels of inflation.
The other risk looming is the prediction of a third wave of the pandemic. But, it is widely expected that the disruption potential could be muted as a significant amount of the population is likely to be vaccinated, thanks to the vaccination drive of the government.
Q) What is powering rally in capital goods, Utilities as well as oil & gas space? These 3 sectors were top sectoral gainers in May?
A) Over the next few years, we see a good case for the economic recovery cycle unfolding. The government's focus on infrastructure creation is commendable.
The manufacturing sector-driven capex too is likely to pick up on account of initiatives such as the PLI scheme. Along with this, import substitution is another focus area for the government.In the meanwhile, we have already witnessed significant deleveraging in the corporate world which shall also aid in the recovery of capex cycle. All of the above bodes well for the capital goods sector.
The risk of a rising interest rate is likely to have a notable impact on the valuations of growth sectors/stocks. As a result, in line with the global trend, in India too, there has been an investment rotation into value sectors/stocks.
Utilities have been one of the beneficiaries of this trend as several fundamentally strong companies were trading at very attractive valuations.
Even after the recent rally, many of the names in this space continue to be available at relatively cheap valuations.
Another factor that has worked favourably for utility companies is that they are proactively trying to address investor’s ESG concerns at a good pace which is helping them get better valuations.
Finally, when it comes to oil and gas space, the rise in crude oil prices has been very beneficial for companies operating in this space. This was at a time when valuations were already very attractive.
Q) What should be a strategy of investors at a time when markets trading in unchartered territory? Should they put lump sum or in parts?
A) At this point, equity valuation appears to be fully pricing in the positives. However, from a medium-to-long-term perspective, there is scope for an investor to participate in the economic recovery cycle, which makes staying invested an attractive proposition.
Investors can choose to participate in this story either through lump sum or through SIP.
If you are an investor looking to make a lump sum investment, then the optimal approach would be to invest in a dynamically managed asset allocation scheme and initiate SIP into equity scheme(s).
What is important here is the investment time horizon. The longer the duration of investment better is the outcome as the true power and benefits of compounding start unfolding.
Q) Will crude above $70 or $80/bbl hurt economy and markets? Which sectors are likely to get impacted the most?
A) Till the time crude continues to hover in the range of $70-$75 a barrel, we believe it may not impact the economy and markets in a big way.
The positive aspect here is that crude trading at such a level indicates that economic activity across the globe is gathering pace which is a positive sign.The negative side is that it leads to higher inflation, increasing the cost of various products and services in the country.
In the short run, while sectors such as aviation, paints and several others are likely to be impacted, but at the same time companies operating in the upstream oil and gas segment could benefit from the rise in crude oil prices.
Q) Do you see demand revival by Diwali?
A) The impact of the second wave of the pandemic has been deeper (into the rural) and more severe. Companies largely expect that while there will be an improvement in the economy, the pace of demand revival maybe not as sharp as seen last year post the first wave due to low pent-up demand this time around.
But, one can never be too sure as the intensity of revival post the first wave was beyond consensus expectations.
Q) ICICI Prudential Multicap Fund has been among the top performers in its category. What has aided the fund performance?
A) The robust performance of ICICI Prudential Multicap Fund was made possible due to the calls we had on stocks selected on a bottom-up basis from pockets such as financials, autos, auto suppliers.
All of these picks were based on the idea of economic revival which played out well and reflected in fund performance.
Q) With small & midcaps in focus and largecaps provide much-needed stability, are you planning for another product in this category?
A) We are planning an NFO of ICICI Prudential Flexicap which is around the corner. From an investor’s perspective, among the equity mutual fund categories, flexicap is one of the most interesting categories as there is no limitation of any sort in terms of allocation towards various market capitalisations.
The large cap exposure in the portfolio provides defence in times of turbulence, while the exposure towards mid and small caps aids in generating better returns over the long term. The balance between the risk and reward makes it a very reasonable investment avenue for equity investing.
With regards to what makes ICICI Prudential Flexicap Fund different from the existing names in this category, we wish to highlight that when it comes to ascertaining allocation or during re-balancing times, the allocation towards large, mid and small cap names will be based on in-house market-cap model.
Apart from this, the fund manager would further look into the business cycle or macro-economic indicators to fine-tune the model allocation.
While the market valuation is rich, the outlook on earnings growth remains positive. The deployment phase will be gradual in nature and more importantly will be done judiciously by selecting sectors and stocks where we see opportunities for reasonable risk-adjusted return from a medium to the long-term timeframe.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.