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S Naren Executive Director, ICICI Prudential AMC
Aug 04, 2017 | Source: Economic Times
Is the rally overdone? We try to look at the market on four parameters, namely valuation, cycle, sentiment and triggers. Today, on valuation basis, we are in a situation where on a price-to-earnings (PE) basis we are costly; on price-to-book (PB) we are above average; on market cap to GDP, we are just above average and if you look at interest rates and take the inverse of interest rates and earnings yields it is slightly above the average. So on a valuation basis markets are not cheap but not extremely expensive in our framework.
On the second parameter, namely cycles. On that basis it looks like it will take two years for the capex cycle to come and for capacity utilisation to be higher than where we are.
On the third parameter, namely sentiment, you have to be careful. Foreigners are investing and domestic investors are investing with gusto. So sentiment is the most worrying part. In December and January, FII flows were negative, but now locals and FIIs both are investing and locals are investing with gusto.
Finally, on the last parameter, namely trigger, I believe till earnings come we are safe. What worries me most is earnings coming quickly. The day it comes, investors will give high multiples on high earnings and make their biggest mistakes.
Where are you allocating money: Oil PSUs, power PSUs look very cheap at this point. These are the only few sectors trading at 15x trailing price-to-earnings and with a price-to-book below 1.5.
What is your call on the market now?: Invest more carefully as the market goes up. The general perception among investors is that when it goes up, you tend to invest more recklessly. If you take any road signal, you have green, red and yellow. In green, valuations are cheap, now valuations are not cheap, so you are in yellow. Red is when you hit a bubble, we are not seeing signs of a bubble yet. In yellow, you have to look around and be careful, you cannot invest blindly.
We have been marketing our dynamic asset allocation funds which are hybrid funds having a mix of debt, equity and arbitrage. We believe that the equity cycle will peak when capacity utilisation goes up, a few years later. Already the market is accounting for earnings growth. The lesson of every boom is that people forget asset allocation. In any boom, the single rule people should apply is do asset allocation.
Financials are a large part of the Nifty. Can growth continue there? One of the worries is that two years from now, it is possible that 40% of the benchmark will be in financial services. That worries us because historically whenever any sector touches 40%, that sector turns volatile. One of places where we feel profits will rebound in the next 2-3 years will be financials. This is because NPL recognition has happened, provisioning will happen, it will peak and then come down. So the medium-term outlook is good, and the long-term outlook is dependent on how equity markets move. If equities see a correction, financials will participate in that correction.
Biggest worry: If people say equity is the only asset class and say we want to invest all our money only in equities and not in other asset class. Investors should follow asset allocation. A lot of the money which is coming in is coming in hybrid funds which have both equity and debt.
How are the macros looking? In my 28 years of working, I have not seen a better macro picture. You have low fiscal deficit, low current account deficit, low inflation and a concerted effort to reduce wasteful subsidies. I have seen 1991 and now.
Are you worried about the short term disruption due to GST?: GST will create a national network. With all the steps the government is taking to speed up logistics, etc the positive impact of GST over three years will far outweigh the short-term problems. India has launched it at a time when it is easier to get an internet connection. It is easier to implement from a technology perspective.
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