Interview :: Fixed income & equities key investment themes for 2015: S Naren, ICICI Prudential AMC

S Naren – CIO at ICICI Prudential Asset Management Company | January 2, 2015 2:27 am | Financial Express

Pick up in the capex cycle and credit growth will benefit equity markets in 2015 and investors should expect healthy return on equities in a three year timeframe, says S Naren, CIO at ICICI Prudential Asset Management Company. In an interview with Chirag Madia, Naren also says that in 2015, investors should start investing in fixed income products as quickly as possible. Excerpts:

2014 has turned out to be an exceptional year for equities. What is your outlook on the equity market for 2015?
We believe, for 2015, investors can expect very good returns on fixed income, but equity returns will come over the a period of next three years. The environment of lower crude prices coupled with very low inflation and low demand for credit is keeping the current account deficit (CAD) under control which in-turn will help the fixed income market. The big drop in crude oil prices is basically postponing capex cycle in India. Given this scenario, our near term view on fixed income is positive and the long term view on equities remains constructive. We would not be be too worried about international markets because the outlook for India is far better than most global markets except the US. Even in terms of inflows, debt will continue to get foreign flows till the capex cycle picks up. Debt income will see huge interest as India remains one the most attractive economies of world with very high interest rates. I am not sure about the quantum of flows into equity markets, but as said earlier, we are quite bullish on equities over the longer term.

What will the key factors that will drive the markets from hereon and what will be your investment strategy?
A pick-up in the capex cycle will benefit markets. Apart from that, any pick-up in credit growth will also be a big driver. Having said that, the biggest worry will be a rally in crude prices, which might make India unattractive compared to other economies. Our investment strategy is to bet on companies that are exporters because we believe the US dollar will do very well going forward. We are also betting on financials and infrastructure companies from a long-term perspective.

With valuations of many stocks turning expensive, which sectors do you find opportunities in, at this point of time?
Yes its true that many quality mid and small cap stocks have risen significantly in the last one year. But that doesn’t mean there is a dearth of opportunities in the market. Even now with markets going up there are enough opportunities. If you look at our portfolio, we have invested in power utilities as we feel that there is strong opportunity in those stocks. We also believe that there is long term opportunity in quality infrastructure stocks. Currently, there seems to be some limited upside opportunities in there telecom sector. We are also quite bullish on technology because of the strength in the US dollar. On the other hand we are staying away from the consumer stocks because of their high valuations. I don’t find any great opportunities in the mid or small cap stocks. However for the near term it will be safer to invest in large caps at this point of time.

Many of ICICI Prudential’s equity schemes had a dream run in 2014. What were the key reason for success?
We are happy that in this rally investors have benefited because many of them had invested before the start of the rally. In 2014 I think they saw healthy returns by investing in equities and that is more important to us a fund house. It was a broad-based rally so, investing in small cap and mid cap stocks helped us a lot in the last one year.

ICICI Prudential Mutual Fund has come out with the series of Value Funds in the past. Can you elaborate on the 3Ms on which you have built your investment strategy?
Our value fund has completed a decade and given returns of over 25.44% at compound annual growth rate (CAGR) against the benchmark’s 18.41%. I consider Howard Marks, Micheal Mauboussin and James Montier as my gurus and I have learnt a lot from them. In case of Howard Marks, his articles helped me get an intellectual footing which in turn helped me take the right calls. Micheal Mauboussin taught me that if I have a certain view on the markets, then I should also know what will make me change my view. For example, in 2011-12 when India’s CAD was high we thought that international investing was the most attractive investment strategy. Thanks to him, when the CAD started coming down, I knew I had to change my view on those investments and start looking at Indian markets which had turned attractive. James Montier wrote a book on value investing and he is one of the few people who had written tenets of investing. I would say that it was the best article I has read. I think that when we apply all those theories in India, we get certain benefits.

What kind of strategy should retail investors adopt?
It’s very simple. In 2015 investors should start allocating money into equities throughout the year and get invested in fixed income as quickly as possible, before the Reserve Bank of India starts cutting interest rates.

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