Samvat 2080: It's not easy to make money in a tough market like today's, says S Naren

S Naren, chief investment officer of ICICI Prudential AMC

High valuations across the board in the current markets makes it challenging for investors to make money, said S Naren, veteran fund manager and chief investment officer of ICICI Prudential AMC.

In an interview with Moneycontrol, he said the markets are no longer cheap nor is there fear on the street, the two conditions that create the condition for lucrative returns in stock markets.

The veteran manager said the only way to deal with this market is to follow a disciplined process of asset-allocation across asset classes: equity, debt and others.

Mutual funds as a compounding machine will thrive even as Indian investors continue to save and pour in money into equities, which will support stock prices.

Also Read: Why ace investor Shankar Sharma doesn’t buy largecap stocks

He said, valuation of Indian stocks remain high because of substantial new money pouring into mutual funds, and money funneled into equities by insurance companies and pension funds.

The 12-month trailing price-to-book ratio for the Nifty is above its historical average of 3.0x, at about 7 percent premium, according to analysts. In the Nifty 50, stocks like Grasim Industries, Reliance Industries, Tech Mahindra, Divi’s Labs and HCL Tech are trading at a significant premium to their historical average.

'Equities - best asset class'

The lack of other lucrative asset-classes and modest return in fixed-income as well as the withdrawal of tax benefits on debt schemes is making equities the best asset class choice for investors, he said. The flip side of this is that stock prices continue to rise making valuations expensive. “It’s hard to tell if these valuation will come off. Valuation can remain elevated for a long time” he said.

Also Read: Quality banks will grow, but can’t reclaim high valuations of the past, says S Naren

Besides, the fact that over the course of the past year there has been a broad-based rally, has meant that valuations across the board are elevated making it imperative for investors to become very selective. Even three years ago, investors could see there was undervaluation in certain sectors – banks, public-sector stocks etc but there is a need to go stock-by-stock and do a bottom-up analysis to see if they are worth buying.

“You have to go in and look on a bottom-up basis and see whether the sector makes sense, whether the valuation implied in the current assumptions make sense,” he said. “PSUs today definitely look over-valued, whereas three years back, almost as a group, they were undervalued.” He said. Today, it’s hard to call out sector that as a group are undervalued.