ICICI Prudential Mutual Fund has done very well in 2023. It had an equally great year even in 2022. Looking back, what are your first thoughts about the current year?
2023 was relatively a good year for India both in terms of macros and corporate earnings. Domestic investors too reposed their faith and continually invested into Indian equities, owing to which even though there was an FII selloff, the markets did not face a sharp correction.You told investors in the beginning of the year they should be cautious as the stock market was not trading very cheap. Did the market surprise you?
The runaway rally in small and midcaps did surprise but at a time when there are continuous inflows, such a rally is inevitable.
How did you position yourself in the market? We are asking this especially because most IPru schemes have done well in 2023.
The investment landscape in the year ahead appears both promising and challenging, marked by a complex interplay of factors. India’s macroeconomic fundamentals, despite the inherent uncertainties of an election year, paint a positive picture. The nation boasts robust macros, a resilient banking sector with clean balance sheets, and minimal corporate leverage. All of these factors make India one of the most structurally sound markets in the world. These factors collectively lay the groundwork for a flourishing economic landscape, underscoring India’s ability to weather global uncertainties.
Historically, election years have been marked by increased market volatility. At the current valuation, 2024 looks poised to be the costliest election (in valuation terms among the past five election years). In terms of market segmentation, no pocket is inherently cheap at this point. Today, all three segments (large, mid, and small) appear expensive compared to their historical valuation. However, on a relative basis, large-cap stocks seem to be better positioned. What one needs to be mindful about is that most of the positives are already factored into the price at current valuations.
You are betting on banks, IT, automobiles, healthcare, etc. What’s the thought process? Do you continue to be bullish on these sectors?
We continue to maintain our overweight stance on auto and healthcare. In terms of autos, better product mix, effective cost control, rise in premiumisation etc. have contributed to margin expansion. Going forward, demand momentum would also be influenced by recovery in rural growth. Within healthcare, when it comes to pharma, we believe, the Indian pharmaceutical market is expected to maintain steady growth of 10-11% driven by favorable demographics, rising income levels, improved doctor research and diagnostics and growth in chronic, lifestyle diseases.
Over the past decade, banking is the only sector where valuations have not gone up. Most other sectors in this period registered a rise in valuation by 30% to 40%. So, from that point of view, valuations of the banks/financials continue to be attractive. However, last year marked the peak of net interest margins, low non-performing loan cycle and high credit growth. When it comes to IT, we believe the sector is ideal for systematic investing since the near term appears to be challenging while the medium term appears to be good. However, we are unsure of the risks in the long term due to developments in Artificial Intelligence.
Many factors – be it inflation, interest rates, global scenario, geopolitical situation, etc – still could make it difficult for investors. How do you view the scenario?
Globally, inflation and elevated interest rates were a major cause of worry in 2023, but the worst seems to be behind us. The possibility of a sharp economic slowdown across advanced markets seems like a remote possibility and geo-political tensions as and when they flare up will lead to market volatility across the world and India will be no exception.
Mid cap and small cap segments surprised the market with outstanding returns in 2023. Were you surprised by the extent of gains? What is your outlook for these segments? Also, a word of advice to investors who got into these schemes recently.
Investor interest in small and midcaps have resulted in continuous inflows into the broader market, as a result of which this space has witnessed a sharp up move and consequently valuations have become very expensive. The valuation of both strong and weak fundamental companies have increased significantly. Investing in mid and small cap segments may be a risky proposition given the elevated valuations. Therefore, from an investment perspective, one can look for names/ assets which are relatively cheap or fairly valued in this market.
Large cap schemes also offered excellent returns in 2023. Even ICICI Prudential Bluechip offered around 15% this year. The large cap segment is expected to be in the limelight in the coming months as the market becomes more conscious about valuations. What is your assessment?
From a valuation perspective, large caps are better placed than mid and small caps. Once FIIs increase their participation in Indian markets, the large-cap space is likely to attract bulk of these inflows.
You were betting on the multi asset theme in a big way at the beginning of the year. The relentless upward march of indices has kept the focus firmly on stocks. Do you still believe multi asset schemes will gain prominence once the market turns extra cautious?
Multi-asset as a category received considerable investor attention during the second half of the year. We believe as and when investors turn cautious on the markets, hybrid schemes will come under renewed focus. Since it is impossible to predict when the equity market could turn volatile, investing through vehicles such as the multi-asset which provides exposure to three or more different asset classes over the long term can deliver reasonable risk adjusted returns with reduced volatility.
You are a value or contrarian investor to many investors. As growth vs value investment strategy is dominating discussions, how do you strike a balance as a fund manager?
As a fund manager, the primary aim is to buy into a name which offers a reasonable margin of safety. There will always be phases where value as a style may not work well, but for those investors who are ready to stay invested with a long-term view, the experience can be very rewarding. Value investing typically tends to do well at a time when the market is elevated, as value focuses on investing in sectors which are out of favour but offer long term potential.
You always identify the emerging themes in the market. What is your assessment of the stock market and what are the themes likely to play out in 2024?
Over the past year, we turned positive on companies in the manufacturing and manufacturing-allied sectors. Domestic manufacturing, manufacturing allied industries like logistics, metals, cap goods, industrial products, banking and financial services, as well as select consumption ideas like telecom and real estate are the areas where we see favorable risk reward. The government’s PLI Scheme has significantly enhanced the manufacturing environment in the nation.
What is your advice to mutual fund investors in the coming year? What are the things they should be mindful of in 2024?
In 2024, the market levels and the extent of overvaluation will be fairly influenced by the extent of FII investments. Going forward, a substantial rally in 2024 could amplify short-term downside risks. In 2023, investors largely opted for equities but now it’s time to focus on asset allocation. And the optimal approach to asset allocation through mutual funds can be achieved through hybrid categories such as multi-asset, aggressive hybrid, balanced advantage, and equity savings. For fresh equity investments, it is advisable to opt for flexi cap or multi cap or large cap funds. In both flexi cap and multi cap schemes, the fund manager has the flexibility to allocate across market capitalisation basis their relative attractiveness, making it a win-win scenario for investors.
