“Go For Dynamic Asset Allocation Funds”

As 2017 glides into a volatile world and equity markets continue to swing like a yoyo, Aniruddha Bose, strives to glean tips on the best investment decisions in the New Year.

Excerpts of a conversation with S. Naren, CIO, ICICI Prudential AMC.

What’s your broad take on the equity markets in 2017? What key risks do you foresee, and do you feel that a major correction is in the offing?
The markets are likely to be volatile in the first few months of 2017 owing to several events lined up around that time. The newly elected US President assuming charge, followed by the Union Budget on February 1, 2017, all hold the potential to buoy the market either ways. The effects of various initiatives taken by the Central government, divergent Central Bank policy stance globally, outlook on commodity markets and the dynamic environment in developed markets, are all likely to keep the Street edgy. Given these volatile times, we are recommending investors to opt for dynamic asset allocation funds. More importantly, invest with a two-year view as we believe that the benefit of all the current initiatives could start bearing fruit from the second half of 2018.

What sectors are you particularly bullish on for 2017 and 2018?
Infrastructure and telecom are the sectors to watch out for. In infrastructure, there is a general consensus on requirement for development, but nothing much has happened in this space. Going forward, we believe the government may take several strides which will aid in overall infra development and generate employment as well. Telecom, on the other hand, at current valuation presents an interesting long-term investment opportunity.

Coming to the bond markets, at what yields do you see the duration play becoming unattractive? Should investors start switching out of the duration and become more accrual focused at this stage?
We remain positive in the fixed income market and recommend investors to stay invested in long duration funds. For incremental allocation into debt, one can consider short and medium and dynamic duration funds owing to relatively stable and better risk adjusted returns. On the yield curve, we are positive on the two to five-year segment.

Do you see global factors impacting emerging markets in 2017— in particular India?
Any news in the global financial markets has the potential to impact the emerging markets as a whole and India is no exception. Given the positive macro factors and the growth story, we expect India to remain a bright spot among the emerging markets.

What’s your take on how demonetisation will play out over the next 12-24 months… what do you foresee as the medium- to long-term impact on the Indian equity markets, if any?
It is too early to comment as to what the real impact of demonetisation will be. There may be some near term hiccups because of demand lagging in the near term. Having said that, we do not see the impact of this announcement beyond the next two quarters. We believe this step will be a long-term positive for the market and the economy alike.

We know you’re not a big fan of PE ratio as an indicator, but valuations aren’t exactly cheap right now. In the present scenario, what asset allocation do you suggest for say, a moderate risk bearing investor with a three- to five-year time horizon?
Such an investor, for lump sum investments, can consider investing in balanced/asset allocation funds, wherein the fund manager can balance the portfolio as per the attractiveness of debt and equity based on certain market yardstick. Also, continue with SIPs (systematic investment plans) in pure equity fund.

What are your top three “out of the box” stock picks for 2017 and why?
Since we are a mutual fund we cannot comment on individual stocks. From a mutual fund perspective, we recommend equity-oriented hybrid/dynamic asset allocation funds for lump sum investments at this juncture. From fixed income side, we recommend incremental allocation to short and medium duration fund.

Lastly, do you have any words of advice for value investors like yourself?
If one does not understand financial markets, invest through mutual funds.