Excerpts from Bazaar on CNBC-TV18 Watch the full show »
Manish Gunwani, Senior Fund Manager of ICICI Prudential AMC believes the economy is in a sweet spot, which will benefit the equity market. However, he maintains a ‘cautiously bullish’ stance as most sectors trade near their long-term average valuations. He says investors should moderate return expectations.
Gunwani is positive on autos and auto ancillaries after the recent signs of pick up in growth. He also sees signs of revival in consumer discretionary and banking. “We have a constructive view on the pharma sector and long turn duration bonds,” he told CNBC-TV18 in an interview.
He says a cyclical recovery will depend on how deep economy recovery turns out, but early indicators are positive. The investment environment has picked up thanks to a pro-active government. All this has reinstated the India in a long-term bull market theory. “We expect equities to give healthy gains in the next 2-3 years horizon,” he said.
Below is a verbatim transcript of the interview
Latha: Yesterday we had Ridham Desai of Morgan Stanley telling us that one year target could be even as big as 33,000 on the Sensex. That is of course a bull case. What are you looking at in terms of gains, one year or two years, whatever you are comfortable?
A: We don’t give targets but I think the more important thing is if there is a bull market in the economy, we will obviously have a healthy stock market. It does look like we are heading into a sweet spot for the economy because we are heading into a phase where you have a lot of spare capacity and you have demand coming back where there is a lot of latent demand as well. So what happens typically in that phase is when demand comes back with a lot of fixed cost already there in the system, the profitability in those sectors will be fantastic over the next 12-18 months. So I think we are in a healthy spot in that sense and the market should reflect that.
Latha: Typically, what should be the preferred sectors in the initial phase of the economy picking up, we have moved to 5.7 percent, maybe we will stick with at least more than 5 percent in the next two quarters because of agriculture not doing too well but in these phases, should you go to industrials?
A: Obviously there are early stage cyclicals and there are late stage cyclicals. We think the early stage cyclicals would be consumer discretionary like auto, auto ancillary, some of the banks. You can see that the body language of lot of these companies is much more positive today than it was same time last year. So those are obviously the early stage companies. I think the late stage would be industrials, property etc and it will hinge on how deep this cycle is. If we are able to sustain growth without too much of inflation in current account deficit (CAD) then I think we will move to the late stage cyclicals where they will start performing well. So if you look at auto numbers etc, they have already done very well now. So I think the early stage cyclicals are in for a good time.
Latha: When you say industrials, you mean Larsen and Toubro (L&T), capital goods kind metals?
A: There is a spectrum in that. So you have some consumables, which will again be early stage. Some of the bearings companies for example maybe but yes, the heavy capex companies would probably be late stage but again the valuation matters. If you are getting them cheap, they would be interesting even now.
Sonia: Maruti is one of your top holdings in your portfolio and you have a lot of positive triggers over there, would you recommend sticking to passenger vehicle names only or because of the revival in the commercial vehicle space, even some of the beaten down names like Ashok Leyland etc look good?
A: We don’t specifically want to mention names but broadly, auto and auto ancillaries is a great sector to be in because obviously you have a domestic recovery, which for this sector can be pretty early because once the sentiment turn, people tend to purchase these items but there is also a big export element for both auto and auto ancillaries, which could be very structural in nature and the balance sheets are clean, the managements are reasonably good. So I think that is a great sector to be in broadly.