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Stay in stocks, bonds; PSU best bet for now: ICICI Pru

The best time to invest, S Naren of ICICI Prudential says, is when there is blood on the dealing street and the recent correction in the market has provided that he adds.

In an interview to CNBC-TV18, Naren says investors should stay invested in hybrid mutual funds-  Funds that have a combination of equity and bond weightage. His rationale is that equity mutual funds are unlikely to give huge returns, atleast in the short-term.

However, Naren continues to be a bull in the slightly frayed Indian equity market.

“Indian macro is in the best shape possible right now. However, we can’t start worrying about every problem around the world and let it impact us,” says Naren who believes every correction in this market is an opportunity to buy.

So what tops his pecking order? Public sector units (PSUs), he says as one can get them at extremely cheap valuations with the advantage of a robust outlook for the next three to five years.

Below is the verbatim transcript of S Naren’s interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Sonia: We need calming voices at a time when the market is so turbulent. What is the strategy that long-term retail investors should adopt now? because, the last say, 6-12 months, the only strategy that has been advocated is invest into mutual funds in a staggered manner. Now, when you see a lot of global volatility, do you reckon sitting on cash or do you think that one should continue doing what they did up until now?

A: Over the last six months to one year, we have been recommending investors to invest in fixed income and invest in hybrid strategies like the balance strategy. I believe that now, given the way the markets have shaped up, it is possibly something worth considering investing more aggressively, by looking at pure equity strategies on some basis also. Instead of only on systematic investment plans or systematic transfer plans. The reason being, that in our framework of investing we like people to invest a lump sum when there is fear. As you know, today there is fear. When the return are bad, for example, the one year return on the index is now negative and when you see big foreign institutional investor (FII) selling. So, at this point of time, all these three points are being ticked and therefore we think it is a good time to consider lump sum investing.

Having said that, can you get mega returns in equity? Does not look likely. I believe that you can get decent returns in equity. To, get mega returns in equity, you need goods and services tax (GST), land bill, sharp cuts in interest rates. Resolution of the infrastructure bad debt problem. Improvement in the real estate markets. If all these things happen then you can get very good returns, but otherwise you should prepare yourself to invest today with a decent return possibility.

Anuj: Just going through some of your recent portfolio changes and couple of things stand out and you can correct me if I am wrong one is that it looks like you have started to take some more bets in the metal sector and you are a bit negative on pharmaceutical. If you could first tell us if that is right and what would your reasons be for these positions?

A: It is very simple, if you look at a sector the best time to invest is when there is blood on the street. This is something which has worked for the last 50-60 years. If you look and see which is the sector where there is blood on the streets it is metal sector. Most of the companies are loss making and there is a possibility of huge bad debts if the current situation happens to some of the weaker metal players. In my career in investing I have seen that if you invest when there is blood in the street in a sector, whether it be textile, whether it be sugar, whether it be metals, whether it be banks I think there is very good potential for long-term investing in that sector.

Today, given the fact that, on other hand, if you see the pharma sector everything is going for them. There are hardly any problems, things are doing well, valuations are expensive so you need to have some fund sources to buy the sectors in deep trouble which are extremely cheap. So, the pharma sector sell off is not due to anything due to the fundamentals of the sector. It is due to the fact that other sectors are very cheap rather than pharma being either very costly or in trouble.

Sonia: What kind of realistic returns can one expect for the next say 6-12 months given that if this China situation gets worst then the global liquidity could be crimped down. For India particularly what returns one can expect?

A: I can give you a number and it is very easy to give a number of 10-15 percent or 10-20 percent. The fact is no one goes right in these numbers. Show me a person who expected sub 8,000 Nifty in August at the beginning of July or something like that. So no one gets right on numbers having said that we get too worried about global events. As you know we have seen Italy, Spain, Greece and Ukraine at one point of time Dubai so periodically you will have global problems.

The time to invest lump sum in equity would be during global problem. If everything was smooth you would have huge foreign institutional investors (FII) buying and may be not the time to invest in a very aggressive manner. So, I would say that it is good for the Indian investor that you have these periodic global problems to give people opportunities to invest.

Considering that at this point of time if you see mutual fund equities is around USD 50-60 billion whereas FIIS is about USD 330 billion. So, these periodic corrections which come due to global reasons is an opportunity for Indian investors to increase their position otherwise bulk of our market is non foreign owned.

Sonia: We will come to the PSU banks in a bit. You are invested in stocks that have seen massive derating. Do you keep the faith and hold on to these companies because of the pedigree of the management or do you start to perhaps trim your positions here?

A: In the dynamic plan, we have always pursued a counter cyclical strategy to look at sectors in trouble where the long-term outlook is very good and the valuations are very attractive. And that is the strategy we have followed over a long period of time as part of the process. So, we are always on the lookout for areas where we think the long-term outlook is very good and where the current valuation is very reasonable. And we keep looking at stocks and sectors for investment in this manner.

Our experience over a long period of time has been that such a framework is conducive for long-term investing and if you see most of the global investment gurus, they recommend investing counter cyclically in a value framework for long-term investment returns. And today is one such opportunity where you have wide divergence in valuations and you have some sectors which are very cheap and some stocks which are very cheap and whose long-term outlook continues to be very good with doubtful short-term outlook. And we believe that such an approach should actually lend itself to very good long-term investing.

There are always resistances in the short-run and they will continue to be there.

Anuj: One space where investors have made lot of money is oil and gas sector at least in some stocks like the HPCL and the BPCL of the world, the oil marketing companies. It looks like you have decided to book profit in this space because in your latest holdings that is not part of your top holdings do you think the most of the crude story is now priced in some of these stocks?

A: Our view on the oil marketing space has been that essentially they are regulated entities whose profits are likely to be more like a regulated return company. So, when a sector like this is very cheap it makes sense to actually invest in it. If the sector does become costly then we actually see whether it may make sense to hold on or we see other regulated return stocks trading much cheaper where we can actually invest in.That has been our investing framework.

For the market to believe that every drop in oil leads to an increase in margins of the oil marketing companies is not logical. We do agree that over the last few years entire problems of the oil marketing companies have been resolved and with diesel and petrol pricing being freed we have a reasonably interest regulatory framework. Having said that I don’t think the profits in that industry are inversely correlated to crude as the markets seems to think it is. That is where the difference between us and market in that sector exists.

Sonia: You have been through many of these cycles where you have had patches of panic and then once again, you see a swift recovery? How different is this this time from 2008? I do not mean to compare it in the sense of a major crisis, but this time there are so many uncertainties. At least in 2008, we had one swoop of a fall and we knew the reasons for that. But now no one seems to know how bad the Chinese situation can get. So, how do you wade through a patch like this?

A: If you look at Indian macro, I think it is in the best shape that I can think of. Look at fiscal deficit, current account deficit, and inflation. So, if you start worrying about every problem in every part of the world, then you will never be able to invest in equity market till it becomes 25 price-earnings (P/E). So, if the market is 25 P/E, at that point of time, everything will be looking good. Every economic data will be looking good. So, through this period of looking at markets, I have seen that the best times to invest in equity is when there is pessimism, when past returns are bad and when I see a little bit of panic. And I see that today, not in the domestic market thankfully but, the global investors’ behaviour. So, just think about it and the year’s low, you see FII selling at this point of time because crude is so low, inflation is coming down, there is potential for interest rate drops, and at that point of time we are seeing selling from FIIs, is that an opportunity for the domestic investors? Certainly. So, our view has been that and what I have seen is that it is years like 2007 where I worry about. In years like 2008, are opportunities is for investors and the current correction is again an opportunity for investor. And if you keep waiting for all the problems to get resolved then I do not think equity investing is not about investing when everything is perfect.

In fact we did some work and found out that the best time to invest in equities is when industrial production growth is very low, fiscal deficit is very high and credit growth is very low. And the best time to take out money from equities is when credit growth is very high, fiscal deficit is very low and industrial production growth is very high. So, why this works is because equities as an asset class, you have to invest into problems and take out money when everything is alright. That is the model which works.

So, that is why for us, this correction at this point of time, we see it as an opportunity. We believed in volatility right through. Now, we think with this correction there is scope for investing more aggressively rather than less aggressively. We will know only later that which was that exact bottom point, but one thing I was telling my colleagues today, that somehow in August, market corrections happen. If you see august, 2011 and August, 2013, August, 2015. So, one of my colleagues pointed out that we have to start worrying about odd years August because in those years, markets seem to correct substantially. So, August is a good month invest, unlike what Mark Twain says. And I think that opportunity has presented itself to investors, Indians are under invested. So, I see this as an opportunity rather than a problem.


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