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Mkt expensive but looks good from 2-3yr view: ICICI Pru AMC

The Indian equity market this week gave up the gains it made in the past two weeks and one reason for the same has been poor Q4 earnings and a consensus that upcoming results too won’t cheer.

In an interview to CNBC-TV18, Manish Gunwani of ICICI Prudential says that the next two to three quarter earnings are likely to be volatile and even if we start seeing very healthy macro, it will take some time to translate into earnings.

Also read: Q4 earnings season weigh on markets despite positive data

While Gunwani believes the market valuations are way too expensive, he is positive on the market from a two to three year perspective.

“What has happened is that we have specific pockets of quality; super largecaps which are expensive; some stretched cyclicals, but one can build a reasonably healthy portfolio, kind of trading off valuations and earnings growth over next two to three years,” he says.

Below is the edited transcript of Manish Gunwani’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: We were making some headway in the past two weeks but most of that was given up this week, making it a disappointing one. Are you concerned about the way earnings are shaping up?

Gunwani: Not really. We do expect next two to three quarters to be volatile. We have a very healthy macro, but for it to translate into earnings growth, will take some time.

The valuations today vis-à-vis, a year back, are not that cheap. If looked at earnings in three buckets, global cyclicals, domestic cyclicals and defensives – global cyclicals have a problem that metal and oil prices are low, domestic cyclicals , the macro will take time to translate into earnings for cyclicals and in terms of defensives they have already done well for the last three or four years.The valuations are not very cheap on the defensive side. So, it is a kind of a mixed market.

It will be a challenge to also get a sectoral leadership out here because there are sectors which have done well in last three to four years. The valuations are very healthy, discounting most of the earnings growth that is going to happen.

Even in the defensives there is a lot of cross currency impact along with high valuations.

On the domestic cyclical side things are very good from a two or three year perspective but you are going to get these waves of optimism and pessimism. Valuations again have lagged defensives but the valuations are not as cheap as one year back.

Latha: As a Fund Manager you will have to stay invested in and you can’t sit on cash but for those who can, is there only tactically a space to wait and not rush in to buy or is it even more than that, maybe stay invested in debt because with good inflation numbers maybe there is some money to be made in debt and then you can move the money to equities?

Gunwani: It is very difficult to time equities as the sentiments are changing so rapidly. For example, couple of hybrid products like dynamic and balanced advantage do what you are saying in terms of rebalancing between debt and equity dynamically.

However, otherwise if we have a positive view on equities from a two to three year perspective, there is a reasonable value out there.

What has happened is there are specific pockets of quality, super largecaps which are expensive, some of the cyclicals might be stretched but you can build a reasonably healthy portfolio, kind of trading off valuations and earnings growth over next two to three years.

Sonia: Last week the interesting part is that while pharma and IT were down, oil and gas made a bit of a come back with names like Oil and Natural Gas Corporation (ONGC) up 6 percent and even Reliance Industries delivered very strong set of numbers on Friday. Would you increase your exposure to the oil and gas space specifically the names that I mentioned?

Gunwani: We do have a reasonable exposure out there purely because of the fact that from a valuation perspective, metals and oil and gas are the only two sectors which on historical basis are cheap if looked at long-term price to earnings or price to book bands.

We have some exposure in the space. What probably helped is the crude move because at the end of the day, a lot of the earnings in that space are dependent on crude price.

Latha: How would you approach financials? We had two banks announcing numbers in the week that just went by. Excellent numbers, they got sold off so which part of the finance space will you like?

Gunwani: There are various segments in that. There is a very healthy weight on private banks. It is a bit of a consensus call but you can’t deny that it is a very structural story for multiple years to come. We also have reasonable exposure to PSU banks because they were the best performers this week. Also, they are under-owned so that is an advantage.

However, if we are going to see an economic recovery over two to three years, we do think that PSU banks will benefit a lot apart from the fact that the government also seems to be doing a lot of things to improve the governance out there.

So, it is a very interesting space where you kind of buy for cyclical reason but who knows it can turn out to be a structural story as well.

Sonia: The other big talking point last week was Tata Consultancy Services (TCS), it fell 7 percent after what was a sub par set of numbers. Is that a good buying opportunity, not just TCS, I am talking about the entire sector?

Gunwani: I don’t want to comment on individual stocks. However, generally as I said some of the very largecaps in the defensive space, we still think the valuations are quite stretched. The absolute markets are such that for them to compound over three or four years looks like a very difficult task.

Sonia: So that would be restricted to largecap IT or you can associate that with largecap pharma as well?

Gunwani: Both the spaces, there are stocks being picked up. There are certain stocks presumed to be overvalued in those spaces. There are certain stocks where reasonable returns can still be made.

Latha: As a sector would you have already in the past few weeks or will you trim the sectoral exposure?

Gunwani: As I said, it is a very difficult market to navigate from a top-down sectoral perspective.

The quality companies are very stretched. Their long-term price to earnings are taken, price to book are very stretched. Ideally you would love to buy them but the relative valuation comfort is in companies in metals, oil and gas, etc.

So, you will have to mix and match. There is no sector leadership we are seeing right now.

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