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S Naren: 2019 January much better for stock-pickers than 2018 January: S Naren, ICICI Pru AMC


2019 is going to be a volatile year. That is the reason we have been recommending, calling it the SIP year, S Naren, CIO, ICICI Prudential AMC, tells ET Now.

Edited excerpts:

Will 2019 be a good year for investors or would it be a year where markets will get earnings projections wrong, politics will have a larger role and the market mood will very choppy and unpredictable?


When you compare 2018 January with 2019 January, our view is that 2019 January shows a greater safety margin than in the same period 2018. In 2018 January, most of the market looked fully valued and most of the smallcaps and midcaps looked over-valued.

Starting 2019, you find that 80% of the stocks are fairly valued and a small set of stocks could be considered overvalued. So from a mutual fund point of view, which is long-term investor point of view, 2019 January is much better time than 2018 January.

Having said that, basically what happens is an election year coupled with US Fed’s last few tightening makes for a volatile year and therefore again from the point view of mutual fund, it becomes very easy to look at 2019 as a SIP or STP year. It is very different from 2018. In 2018, we believed that as you went down the market cap curve, there were more risks and now actually there are much more stock picking potentials and you have a much better environment for stock pickers now although it was believed last year was the best year for stock picking. But frankly, except the four or five mega caps, everything else actually went down through the year.

So 2019 is a more interesting year for all of us. It is equally likely to be volatile but I would call it a year to put money and accumulate money in equities at this point time. So that is why I like 2019 over 2018 clearly as we speak.

All through 2018, the call was stick with largecaps or at best diversify into multicaps. Is the risk reward ratio in favour of midcaps a little bit more now?


I believe you are safer in stock picking now rather than going by capitalisation weightage because if you look at largecaps, there are clearly 10 stocks which look overvalued at this point of time. On the other hand similarly in mid and smallcaps also, there are stocks which look overvalued.

Having said that, today there are a number of smallcaps that have corrected 30-40%, midcaps that have corrected 20% or so. I would say 2019 is stock picking time rather than deciding which caps to go and where we have changed. Look at where we were and consider the calls that we got wrong. We did not recognise that oil could come down from $85 to $53 and that actually completely changed the outlook towards sectors like infrastructure or banking which clearly benefit with lower interest rates. Banks get some treasury profits as well. Sectors like banking and infrastructure have seen reasonably positive change through the year particularly with the fall in oil.

Do you think that 2019 would spell great news for the financial sector and is there an opportunity to generate alpha for the beaten down names?


Clearly, banks are in the best situation they have been in the last five-six years. Their cost of borrowing is not going up. Their lending rates are going up. The NPL cycle in corporate India is about to get over and lot of provisioning has been built for that NPL cycle. So, banks are in extremely good phase compared after 2015. From a fundamental point of view, we are in the best phase for banks and that need not be true for all other parts of the financial services industry but banks are the biggest.

They have contributed to lower earnings growth in the last six to seven years and they are going to give a cyclical benefit over the next two years in earnings which should help overall earnings of largecaps pretty significantly in the next two years. I would be much more positive on corporate focussed banks rather than the retail banks because the retail banks have had a good run over the last six to seven years.

How long can we ignore the selling in US markets? Is it the biggest risk for 2019 that the correction in US market has started largely due to economic reasons and if the correction multiples, we could be looking at serious downside somewhere in 2019?


People make use of valuations as a way of saying that the US market is extremely overvalued. When I look at valuations of let us say some of the consumer names, they do not look very high. Clearly, the US market required a correction but I am not so worried about US markets. The US economy is possibly one of the best economies at this point of time and I do not see the risk of a big fall in US. The conditions that existed in 2007 in the form of extra leverage with people and various other problems in the financial system, I do not see that kind of a situation at this point of time.

I got a chance to meet with some good global economists and they say barring corporates to some extent, I do not think there is any evidence of extremely high leverage. I am basically not worried about big fall in the markets. But that does not mean that markets are headed one way upward because there is no fear still in India or many of the markets.

Second, look at the EMs. There was a cycle from 2009 to 2018, which I would call the US cycle and I would even call it the US tech cycle because you can look at companies like GE over the last 10 years and say that nothing has happened in US. In 10 years, GE has gone down so significantly and I would say that it is the US tech cycle which looks more advanced.

Emerging markets have not had a bull run for a long period of time. I am sure that in the last 10 years, particularly on a dollar basis, emerging markets have shown a significant underperformance. I am not in that extremely worried camp. The challenge at this point of time is how much positive returns can you make rather than expecting negative returns or minus 20 or something like that.

In a country like India, corporate papers give you 8-9-10% on a three-year basis and so the benchmark return that you have to get on corporate papers for equity to deliver is a challenge we are facing. This is one of the reasons what we have been always doing is marketing debt funds through the year and contrary to what people think, 2018 was a year that most debt funds did well and even today, corporate papers are giving you good interest rates. So I would say the challenge is how much does equity outperformed debt and that is the challenge rather than worrying too much about equities per se.

Considering that bond yields are sub-7.5%, what kind of return can we expect from debt funds?


Corporate spreads in the post September period have gone up substantially. For example, you have a situation where 10-year G-Sec yields have gone down and many of the corporate papers on the three-year side has actually been giving good spreads. People are looking at 10-year yields and saying interest rates are down. I can assure you most of the corporates are actually borrowing at higher rates except may be a few AAA names. Most of them are borrowing at higher rates than what they were borrowing six months back and that is why I would say debt is remaining an interesting asset class at this point of time particularly shorter duration debt on the corporate side is turning out to be a reasonable interesting asset class.

How much global pressures can the Indian market withstand in 2019?


2019 is going to be a volatile year. That is the reason we have been recommending, calling it the SIP year. I do not think volatility is going to be any lower in 2019 relative to 2018. But the way, we always look at whether oil is going down along with the markets or if it is going up when the markets are going down. India is very vulnerable even today to oil going up and markets going down together like it happened in October-December when markets and oil fell together. I think India will always remain outperforming market because one dollar drop in oil improves India’s current account deficit by $1.5 billion or so. It becomes a powerful positive for India.

I would say that more than global markets, I will watch oil and I would be worried if oil started to go back to $75-80.

If there is global volatility, do I worry so much? No I do not worry about it. Having said that, do we expect 2019 to be volatile? The answer is yes. Do we have appropriate strategies within our mutual fund to help make money in volatility, the answer is yes both through products like SIP, STP and balanced advantage as a category, equity savings as a category, etc.

I would say that we are not really worried about global volatility. Clearly elections are important. US is important and as I keep telling people there is no point in asking fund managers on elections, they know nothing. That is the way I look at it and but I would say 2019 is a much more interesting year to invest in rather than 2018 and that is the challenge I have in explaining because in 2018 while everything was looking better, the valuations of many of the small and midcaps were also much-much higher than where they are today.





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