At the recent Morningstar Investment Conference, Sankaran Naren, the chief investment officer at ICICI Prudential Mutual Fund, shared his views on the market recovery, gold, economic stimulus and credit funds.
Here is a synopsis of his discussion.
Your view on the economic recovery
India has had a much more durable market recovery. Over the past three decades, I have never seen interest rates at 3-3.5% in India. Home loan rates at 6.5-7%. Corporates are borrowing at such low rates that AAA rates are hovering at 4.5-5% (3 years) and 5- 5.5% (5 years). That is like an economic stimulus.
So, I would say most of the top-quality corporates are seeing a stimulus of a very good kind. The government gave a guarantee scheme whereby anyone who had a banking system borrowing got 20% guarantees. So, the banks could give a 20% top up guarantee, the loan guaranteed by the government. And that enabled many of the small and medium enterprises to get money from the banking system. So that helped the SMEs and top corporates borrow cheap without any problems. They had LTRO kind of schemes, so they were taken care of. Anyone beyond that got affected and continue to be affected. That is the only challenge at this point of time.
There are parts of the economy which are stranded. And that is an issue which will have to be tackled, not only in India but across the world.
But the end result at this point of time is much better than what any one of us would have visualised. The GST numbers, power demand, vehicle traffic of the truck sector, automobile sales - phenomenal compared to what we would have imagined, given the scale of the lockdown.
A part of it could be pent up demand. But I think most of it would sustain as long as interest rates are very low. And we should not forget, in India when you have a $25 drop in oil that is a big stimulus to the economy because your current account moves from deficit to surplus that leads to RBI buying dollars. RBI has bought $100 billion, that has injected another Rs 650,000 crores, which is $100 billion in the economy. And that has resulted in another kind of stimulus to the economy. If oil were to go back to $60 or $80, that stimulus will disappear. If interest rates go up due to any global event, that stimulus would disappear.
Your view on value and growth
In 2012, we launched a U.S. fund. At that point of time, the U.S. market had done badly for a little over a decade. Forget growth and value, if you have 12 years of no return, it's actually very attractive because you are going to get the compounding benefit of those 12 years of no return at some point of time in the next five to 10 years. And that is what happened in U.S. market between 2012 and 2020. Today, multiple funds are being launched targeting the U.S. market. And that is after an 8-year rally.
Today, we have multiple sectors that have delivered no returns for 12 years. Metals. Power. Oil. Telecom. The market seems to think that the consumer durables sector will grow without any requirement of metals in consumer durables. Automotive sector will grow without any requirement of metals in automotives. Aviation will grow without any requirement for oil, either for the automotive or airline sector. How can that be the case?
I believe that we are going to have a lot of growth sectors that have not delivered returns for 12 years. The number of companies operating in power, metals and telecom, are a handful. Consequently, the quantum of profits are going to accrue to a narrow number of players.
So, it's not a growth versus value divide, but more a divide in terms of sectors which are going to have a lot of opportunities.
Many of the growth stocks in pharma and technology have recovered. It's value stocks that have not recovered. Across the space - large, mid, small, I think there is a big case to put money in value. There needs to be a good growth comeback in the economy, not a concentrated economic recovery. I expect it to come back in the next two years. But overall market valuations at this point of time are not very cheap. So, it is going to be much more relative market recovery in these stocks rather than a big absolute recovery.
Your view on the riskiness of credit funds
Credit is a very small asset class in India compared to other markets. Most of what is credit in India would be investment grade in other markets, because we have a very small credit market in the corporate sector in India.
Somewhere last year, it was widely believed that credit is an unsafe asset class and equities is a safe asset class. In March, equities fell 25%. But credit risk funds performed well. And still, the widely held view in India is that credit is a more unsafe asset class than equity.
Investors equate credit funds with fixed deposits, which is where the problem lies. Also, investors must understand that credit is a cycle. There are times when there will be no credit events; there will be times when there are a lot. And finally, investors need to comprehend the role of interest rates.
The funds delivered good risk-adjusted returns in the past, but that may not be the case going ahead. The funds performed well because over the past few years interest rates fell substantially, making us very positive on debt as an asset cash class. But now, unless interest rates fall in the next three years, you're not going to get double-digit returns. If interest rates were to go up in the next three years, returns will be much more muted in debt funds. When interest rates go up, many of the long duration debt funds will not give you high returns.
I continue to think debt mutual funds are attractive, but past returns are not sustainable.
Your view on gold
Unlike anywhere in the world, the bulk of the Indian middle class has gold. It makes sense to have a certain amount of your net worth in gold all the time, but is today the time to create that position? In our multi-asset fund, we added gold in 2018, when it was unfashionable. That turned out to be a phenomenal time to add gold. Today, it’s a very tough call.
I advocate a small position in gold if you don't have it, but if you already have it, I don't think this is the time to add to that position.
Your big call today
My big call at this point in time is to put money into good dividend yield stocks of stable companies, where the company is not leveraged at this point of time. Or, any mutual fund focused on high dividend yield stocks of stable companies.
