Financial advisors and experts usually recommend a chunk of your money to be invested in equity markets and the remaining in debt markets. But Piyush Garg, Executive Vice-President & CIO, ICICI Securities, says that the interest rate cycle is near its peak, and hence, the fixed income market offers a good opportunity for investors to make superior risk-adjusted returns. But he is keeping a sharp eye on the equity markets as well. Garg believes that equity market valuation in India is on the higher side and urges investors to keep aside 10-15 percent in cash, and deploy it when the Nifty 50 falls towards 16,000 levels. Edited excerpts from a conversation with Moneycontrol:
Equity markets have been flattish since November 2022. Many retail investors are waiting on the sidelines for the markets to fall and then invest. Is that a wise move?
It's very difficult to answer (when markets might fall). One way to circumvent the uncertainty is to do a systematic investment plan (SIP). My sense is that equity markets will remain subdued for the next six to eight months.
In a flattish market like this, SIP is a brilliant strategy. It’s also important to top-up your SIPs, periodically. If you were, say, doing Rs 100 SIP (a month) till about a year back, we have been advising that you should increase it to Rs 110, to Rs 120, to Rs 130. Almost every six months, you can keep increasing the SIP if the Nifty remains in the 17,000 to 18,000 levels.
And if it falls to around 16,000 levels, maybe you can even put up a lump sum amount as well.
Speaking of which, SIPs have gone for a makeover in recent years. Some fund houses have variants of SIPs that, for instance, invest more when markets go up, look at valuations to determine how much money should be invested each month, bring in a little more dynamism. Is that good or does this end up confusing investors more?
It's actually not a bad product. In fact, it's simple.
The only thing is that because of its nomenclature, some people might get confused.
We are definitely seeing earnings growth. The Indian economy is definitely growing. And don’t forget, the nominal GDP (Gross Domestic Product) is high. The expected returns from the equity market is always around the nominal GDP (real GDP plus inflation), not the real GDP. Nominal GDP growth rate for FY22 and FY23 is, on an average, 18 percent. However, nominal GDP growth is likely to fall towards 10-11 percent levels for FY24-25. And this will put a somewhat downward pressure on earnings as well.
Which sectors would you be bullish on in 2023?
Banking, to some extent. I am not too enthused about private sector banks as they are overbought, though they should be part of your portfolio. You could include the top-tier public sector banks in the portfolio to create alpha.
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Domestic infrastructure sector looks good as the government has stepped up capital expenditure.
You don't see a non-preforming asset (NPA) issue with state-owned banks?
No, I don't see any NPA issue. Their books are now clean. Public sector (PSU) banks don’t lend the same way today as they used to years ago that led to all those NPAs. Today, we see a lot of controls; laws have changed. Even promoters don't want to default.
The top two-three PSU banks have caught up on technology well, even if private sector banks may be ahead in this race.
You also said you like the infrastructure theme
Infrastructure space should also do well.
Steel is a bit attractive, but it is largely subject to global cyclicality. I’d be a bit careful betting on that.
On the other hand, cement is a very localised commodity. Cement should do well.
The government is also spending a reasonable amount to develop the country’s infrastructure. Companies tapping alternate sources of energy (wind, solar) should do well, too.
Consumption should be okay, too. The worst of inflation is behind us, although it may not ease up anytime soon. But people are definitely spending more.
Which mutual fund categories would you recommend today?
Take an asset allocation approach. Diversify into equity, gold and fixed income.
Within equity funds, have a mix of both, active and passive funds. I strongly believe that 1/3rd of your equity portfolio must be in exchange-traded funds (ETFs). That's the lowest cost product. ETFs remove the fund manager’s risk.
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There’s no harm in taking a risk on fund managers, but you must diversify between styles as well, when investing in actively-managed funds. That’s because, different fund managers have different ideologies, techniques. For example, look at value-styled funds. If you had invested in them in the previous two years, you would have beaten the Nifty 50 index easily. But if you see the past seven-year return, it has underperformed the Nifty 50 index. Similarly, during the past seven-year period, momentum style had beaten Nifty. But in the past year, momentum strategy underperformed Nifty 50 index by around 10 percent points.
Have we seen the last of interest rate hikes?
No. Interest rates might still go up a bit more.
Should we start investing in long-term debt funds?
Even if interest rates were to go up, they won’t now go up by much. Today, the benchmark 10-year government security yield is 7.448 percent. The benchmark repo rate is 6.50 percent. I don’t expect the repo rate to go up beyond 7 percent. There is a 60 percent chance that the repo rate might go up to 6.75 percent, and a 20 percent chance that it might go up to 7 percent.
Even if the repo rate goes up to 7 percent, the 10-year benchmark yield is unlikely to go beyond 7.6 to 7.7 percent (yield curve likely to get inverted). So, we are very close to the peak in long-term yields.
Now remember, if you hold on to your debt funds for at least three years, you get indexation benefit. Even if interest rates do not start to fall anytime soon, they will start to fall within the next 12-18 months. The initial falls will be sharp because monetary policy needs to be front-loaded. When interest rates fall, the prices of debt securities ― and the net asset values of debt funds ― will go up, just as sharply. Therefore, a three-year time horizon works well.
Debt markets have become attractive, while equity markets are at all-time highs. If I have Rs 10 lakh to invest now, what should be an idea asset allocation now?
Put 2/3rd of your money in fixed income investments and 1/3rd in equities.
This is because debt markets are close to the end of the interest rate hike cycle. This cycle comes once in four or five years. You should try to capture that cycle.
If you feel 2/3rd is too much to put in fixed income investments, then put 60 percent in debt.
Put 10-15 percent of your money on the side because there is a reasonable chance that equity markets might correct by another 10 percent from current levels. We believe that is possible because of the global slowdown fears that could gain momentum. When that happens, you should do a lump sum investment.
There are lots of other high interest rate yielding fixed income investments today, with non-convertible debentures (NCD) and bank fixed deposits (FD).
Yes, some bank FDs are offering 8 percent these days.
Look at your income tax bracket. For a retired person whose tax bracket is less than 10 percent, an 8.5 percent FD sounds good, as opposed to someone who falls in the highest income tax bracket, where his post-tax yield falls to around 5 percent. FDs are liquid, but debt funds need to be held on to for three years to be able to get the indexation benefit.
What is your strategy when it comes to investing internationally? US tech stocks have corrected quite much in the last 1 year. Are they worth your time?
Yes, absolutely.
First, the US markets are down, reasonably. The S&P 500 index is down by almost 20 percent, and NASDAQ is down by around 30 percent from their peak levels. And these are always good levels to get into them, if you want to save up for the long term.
It’s best to invest through the index, rather than betting on individual stocks and companies. I don’t want to take a call on the future of Amazon, Netflix and such companies. But the index, as a whole, typically has a very strong chance to recover fully. That is because these are high-quality indices. Some of the US tech stocks were over-valued and so they corrected sharply.
So, yes, you must diversify.
I am also not very positive on the Indian rupee. I see the rupee depreciating. This adds to the returns on US investments.
Are you bullish on Chinese stocks? Some fund houses have again started to sell China-specific mutual fund schemes.
I think, they have run quite a lot so far already. But we must wait for the Chinese economy to open up more, industry to take off, people to start buying more cars, travel in China opening up, and so on.
Once that fructifies and earnings growth comes back, the Chinese stock market may sustain. But I think, the large part of the rally in China may be behind us. Plus, China has a lot of regulatory issues. So, I would not advise anyone to look at China. The US is a much better market to invest in, internationally.
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