No case yet for P/E re-rating; earnings growth key: ICICI Pru MF

The markets are attractive now than a couple of months ago, he said.Below is the transcript of Manish Gunwani’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Anuj: Were you doing a lot of shopping yesterday?A: I cannot comment on that but obviously it gave an opportunity for a large asset management companies (AMC) like us to deploy some money.Sonia: Is this a phase where the market will forget about all the global volatility and just resume its uptrend because that is what it seems like at this point?A: It is not so clear because you are also seeing some upward movement in bond yields globally. Now, the standard narrative has been that the equity valuations are being held up because of lower bond yields and lower cost of capital.Ultimately, it is all about earnings growth. If we get an earnings growth, the market will go up. I do not see a big case for price-earnings (P/E) rerating from here although the market has corrected from the top a bit and maybe we can go back up there. However, largely on a medium-term basis, it is difficult to make a case for a P/E rerating, so basically, it all boils down to earnings growth.Sonia: How do you approach some of these spaces? They have been big laggards, IT and pharmaceuticals. People are now starting to find value here especially in some of the pharmaceutical names. For a long-term investor, is pharmaceuticals a good space to put in money or would you be a bit cautious?A: Definitely, we like a lot of stocks in that space. On a very overall basis, typically, we favour domestic exposure to US or developed market exposure because the predictability of those businesses is higher. But even on the overall largecaps which have exposure to US or emerging markets, obviously, the valuations are much more attractive right now.Anuj: Is there a risk that what we are seeing right now is a big global short-squeeze and India being part of that and maybe in the medium-term when the impact of goods and services tax (GST) or even this demonetization plays out on small and medium enterprises (SME) and on rural spending, there could be some hit. Do you get that feeling? Do you think that risk is there?A: Yes, from the channel checks we are doing and from the companies we are talking to, it does seem that this big reform will hit earnings in the immediate term, maybe this quarter or another quarter. So, there is no denying that. Now, the questions are obviously, it is such a big structural positive that will the P/E take care of the earnings per share (EPS) hit in the near-term, I guess it will work out that way.Sonia: Did you catch this rally or were you one of the fund managers who missed out?A: Our portfolios are probably, I think you can see the data whatever we did. So, we did a bit, but obviously, on hindsight, you think you could have done better.Sonia: So, can this space do better you think?A: I guess so. In the sense that if you see globally what seems to be happening is the political economy seems to be shifting towards a paradigm of reducing inequality and generating growth at the bottom, and that part of growth is obviously more commodity intensive than growth for the top-end. So, if that positioning translates into action, you could see material intensive global growth come back. What happened in the early part of last decade, maybe something like that can happen again.Anuj: Of course in the stock market, a lot is about risk and reward. Has IT reached enough in terms of risk reward ratio for you to look at these stocks from a fresh accumulation point of view?A: What I would say is maybe not at aggregate sector level because while the P/E is obviously attractive, because if you look at the aggregate market cap of that sector, it is quite high at this point of time. But yes, within the space, do we like certain stocks? Yes. Maybe not the largest ones, but yes.Sonia: Midcap names?A: Midcap, even largecaps which we think can probably grow faster and where the potential margin downside is less.Sonia: You are not worried about any kind of protectionist moves from the US because that is what has derated these stocks, of course, apart from issues of their own.A: If we have to believe that the new political configuration is going to focus on growth, on generating employment and if US, already the unemployment is quite low. So, if they need IT skills and if the unemployment is already low, you might hear some noises on protectionism, but ultimately, they will do what is in their business sense which would be that outsourcing would make a lot of sense is unemployment is low.Anuj: Anything that you would want to avoid right now?A: Overall, a lot of consumer staples and even consumer discretionary stocks are very expensive at this point of time. I do not want to paint everything with the same brush, but essentially, a fair amount of stocks in that sector are quite expensive at this point of time.Anuj: Final thoughts from you. Do you see enough tailwinds in the system to take markets to new highs in the near-term itself?A: We do not give market level predictions, but I guess the markets are much more attractive than a couple of months back because you have seen a fair correction on the stock prices. So, definitely, today, market looks much more interesting.Sonia: What about your view on the PSU Banks. Just because State Bank of India (SBI) is surging now it is top of mind. Is this a space that you have been interested in and any allocations towards it?A: We do have decent exposure to PSU banks. To a certain extent, they are obviously plays on the macro Indian recovery. If global growth also comes back, which will manifest itself in better commodity prices, that is where a lot of asset quality issues came from. Those should also get corrected.