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Smallcaps, midcaps to shine in 5 yrs: ICICI Pru’s Naren

In an interview to CNBC-TV18, S Naren, CIO- Equities, ICICI Prudential AMC shares his view on the equity market and his outlook for the next few years.

Below is the verbatim transcript of the interview.

Sonia: Do you think that from now until next Samvat as well a lot of money to be made will be in midcaps and small caps rather the large caps?

Naren: If you take a very long period of time it is always the small and midcaps which tend to do the best but if I look at the next one year for us, I have a simple formula, there are three things which I put as a filter to decide which asset class we should actually tell people to invest in; one is bad past returns, second is fear and third is attractive valuations and today the combination of bad past returns, fear and attractive valuations that combination actually goes to debt mutual funds and not to small caps because in small caps as you know the past returns have been very high.

So if you take a one year view it clearly looks to us that small caps are going to be a higher risk, moderate return kind of investment but of course if you have a three to five year kind of view always small caps and midcaps tend to do very well and if you are willing to bear the risk of small caps the five year experience should be very good.

Anuj: From index point of view how should one position portfolio because we have seen IT and pharma do well. Intermittently we have seen domestic cyclicals do well and for the last one month we have seen banks make a big return. Going forward what two or three sectors do you think would give best returns as far as the large caps space is concerned?

Naren: If you see at this point of time the public sector companies which are likely to do disinvestment in the next six months that would be one good investment opportunity. The second investment opportunity if you see there has been so much of fear which is there in the entire mining related stocks at this point of time. If you go back a year the biggest fear was actually in the oil marketing companies and you know the returns that sector has given.

So if you take a two year period clearly another sector which really looks good are all the stocks which have been badly hurt by whatever has happened in mining in the last six months to one year. That would be another interesting pack.

The third pack which I am very scared about but I see potential upside but I don’t have the guts to invest is these leverage stock pack. If you see the leverage stock pack most of them corrected. In May they all ran up but after May till now they have actually corrected 30-50 percent and again they have become very cheap but to have guts to buy them you need to have confidence that each of these individual companies will get deleveraged and that appears to be a bit of a challenge but if you are a very high risk investor that is the other pack which looks good.

Other than these three areas I don’t think there is any pocket of the market which I can call cheap. People put words into my mouth and say does it mean it is costly, I say, it is not costly but it is not cheap. So, that is where the market is at this point of time.

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