Start nibbling stocks now, go big before yearend: S Naren

With the Indian benchmark indices still under the grip of the bears, S Naren, CIO, ICICI Prudential AMC believes market is giving an opportunity to invest for the long-term, adding that one should look at good quality largecap names. Midcaps, however, still look overvalued.In an interview with CNBC-TV18, Naren pointed out that whenever foreign institutional investors have been big sellers due to global reasons -- such as in 2002, 2008, 2011 -- each time it has provided a buying opportunity for domestic long-term equity investor. One can be marginally overweight equity to start with and then by the end of the year be substantially overweight equities, Naren said.For the very near term, investors should prefer the safety of debt mutual funds even as they make long-term investments into equity, he added.Below is the transcript of S Naren's interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal. Anuj: Nobody would have thought we will go through this kind of market mayhem in the month of January but we have seen that, what next now? You must be getting a lot of queries from your retail investors who have been investing in this market all through last year, what is your advice for them now? A: Last time around the Diwali period our recommendation was to invest in hybrid funds primarily because it was very clear that as long as crude oil keeps going down the entire asset allocation which has been made in emerging market funds in 2009-2012 period that was unwinding. So, we felt that we are in a period of volatility and that period of volatility continues. From a domestic investor perspective while I do agree investors have been investing in equities over the last one year, we see that any period of time where FIIs have been big sellers due to global reasons whether it is 2002, whether it is 1998, whether it is 2008, whether it is 2011 and now, each of these are actually buying opportunities for the domestic long term equity investor which is the basket of investors we look at in the mutual fund industry. So, we see this as an opportunity for investors to actually invest in equity. We have been recommending people that they should be now marginally overweight equities and over the year they should actually become substantially overweight equities because all these years where FIIs sold aggressively - 1998, 2002, 2008, 2011 and now have all buying opportunities and people should make use of them. Sonia: My only argument to that thesis is that even if the price correction comes to an end at some point in the near term the fear is that there could be a long painful time correction in this market and it will take a lot of time before we get the levels that we saw may be six months back. Then what do you do, perhaps there could be better returns elsewhere not in the equity markets, is that your fear as well? A: Our view has always been that financial assets are more attractive than physical assets when you get real rates of interest. So, over the last two years we have actually consistently recommended debt mutual funds also for investors to invest in. We continue to think that for the year debt mutual funds are a very attractive investment vehicle because they don\\'t suffer from the kind of volatility that equity suffers. Having said that I think even now through the year if I had to look at one asset class to invest for the long term, it would be equity. However if you are going to invest with a shorter term view clearly debt mutual funds are the asset class to look at. Clearly if you look at competing asset classes like for example if you take the physical asset classes like real estate they haven’t been doing well for the last 2-3 years and the outlook particularly for residential real estate has not been good across the country for long period of time. So, I think money will continue to come into financial assets. The biggest job that the mutual fund industry has along with all the distributors and wealth managers is to get investors to invest in equities this year. Also last year they were successful, this year is even more attractive for the long term and the challenge is that we have to manage to get the investors to invest this year also and if they do it I think they will have a good experience with equities. Anuj: The big problem for this market all through last year has been the large caps. You have seen almost no leadership and that has continued this year even though the midcaps have collapsed but it is not that there has been any kind of safety in largecaps. Even the safe haven stocks like IT, pharma, even they have sold-off. What do you make of a market like this? A: When you have such savage FII selling as we have seen in the period after August and considering that FIIs have a substantial quantum of investment in largecaps, to see largecap selling was not surprising. In our opinion going forward given that if the market condition were to remain lacklustre for foreign investors, I expect to see a fair amount of buying coming in from insurance and other sectors also. We have been very clear that we prefer largecaps to midcaps at this point of time and over the last 15 days the outperformance of midcaps have also come down. In fact some of the small caps and midcaps have done very badly in the last 15 days and we continue to think there is a case to invest in largecaps and if we had to invest it would not be in midcaps at this point of time. Sonia: I was just going through some of the funds and some of the stocks that you own in your funds. You have high exposure to some of the private banks like ICICI Bank and Axis Bank, some of the corporate lenders where we have seen a lot of these issues crop up as far as NPAs, metal companies etc. Both these stocks ICICI and Axis have corrected 30-35 percent in the last 6 months, what do you do at a time like this, do you keep the faith or do you switch out of these banks and move into some other stocks where there is better value? A: What we have been telling over the last few days is there is a case to do systematic investment or systematic transfer plan even in pure banking funds over the next one year. Over the last 6-7 years in some of the strategies that I managed like the dynamic plan or the top 100 plan, we have been underweight banking for a long period of time and we think that all the problems that are there in the sector like the NPL issues, they are all likely to get resolved over the course of the next 12-18 months. Given that equity markets always work in advance we believe that the opportunity to invest in banking would be over the next one year. This does not mean that today is the bottom or yesterday was the bottom, we believe that a systematic investing in banking would actually help and I would think that banking investment done on an SIP or STP basis over the next one year should actually lead to good returns over the next 3-5 years as the credit cycle improves and as the capex cycle also comes back in 2017 or 2018. So, we are looking at a more constructive view on the sector over the next one year. Anuj: The other problem for this market has been that even in the safe havens like IT and pharma you have not made money something we just discussed right now. However at these levels how would you approach say the largecap IT names like Infosys or TCS? A: The problem with IT sector is that the growth rates which were there 10-years back no longer exists. Today in a sense they are incumbents and not the people grabbing market share from everyone else. So, I think the sector has also got derated in valuations and we think it is a reasonable return, reasonable risk sector. We don't believe the sector can give dramatic returns because the base on which these companies operate today makes it clear that you can't have very high levels of growth from here. So, we continue to think it is reasonable. In the pharma sector most of it has been stock specific. We have had problems due to FDA in specific stocks and those are the stocks which have actually got corrected very substantially. So, in pharmaceuticals we are substantially bottom-up and we would like to look at each individual company, whether the company has a good pipeline, whether the company has got lesser risk on account of regulation and how is the valuation and we think it is a attractive sector but you have to be careful in having weighatges in each company because of the risks which have started to play out in that sector. Sonia: I remember when in the peak of the bull run last year, Anuj and me had interviewed you at one of the conferences where we met and you were telling us about this group of investors in Chennai that you had joined a couple of decades ago and how a lot of you share your investment ideas, your views, etc. What is the mood like currently after the big sell off that we have seen? What are intelligent investors doing at a time like this, are they going out there and looking for opportunities to invest into the market now or are they raising cash levels? A: It is very useful to share investment thought process. So, we share investment thought process rather than ideas. I think anyone who has been in a market for a long period of time, would know that 2016 is a year to invest for the long-term and the key art which frankly none of us know is how to invest through the year. It is very clear that if you have had 15 days of correction like you have had in the last 15 days, today is the day to invest. Historically, March has been a good month to invest, so, we can clearly see that you have to invest both in January and in March. However, how to invest through the year is the only debate that most people have otherwise at a time when foreign institutional investors (FIIs) are selling without looking at price or valuations for reasons which are totally not connected to India, I think there are very interesting opportunities for new investors and for existing investors to add position. If you look at the situation today, it is like if you had a big expense due to a wedding in the family or due to education reasons, you would have to sell stocks and at that point of time it has got nothing to do whether the stocks are attractive or not. It is that kind of a selling which is going on and therefore we think that 2016 should be the year you get well invested in equity, maybe substantially overweight over the year and frankly we will try our best to see whether we are able to communicate on how to invest through the year and that is going to be art. However, I think by December 201, I would say you would have to be substantially overweight equities and you would certainly be a gainer over the next two to three years by being substantially overweight equities by the end of the year. For the entire interview watch video