'We Would Recommend Investors To Stay Invested For At Least Next 3-year'

George Joseph, Senior Fund Manager, ICICI Prudential AMC speaks to BW Businessworld on his take on Indian Equities, Valuation Indicators, ICICI Prudential’s Children-focused Mutual Fund scheme and more.

George, what's your take on Indian equities right now? Do you foresee anything toppling the markets, or are we at the cusp of a big bull run in FY 2017-18?
We are bullish on Indian equities from a three to five-year view and believe the market is fairly valued currently. This is because the macroeconomic fundamentals of the country have improved considerably. We believe indicators like IIP, credit growth, which are at a decade low, have all bottomed out. Some of the other factors like stable currency, real interest rate at around 4% and growth at 7% are all making Indian quite attractive for investments.

On the corporate earnings front too, the worst seems to be over. We believe over the next three years, corporate earnings growth is likely to 20-25%, with the pace of earnings recovery sharper than market expectations, which is likely to provide an impetus to equity markets.

In terms of potential risks, the threat is more global in nature than local. The Brexit implications as new policies are rolled out, fear of further fracturing of EU in the form of a French exit and the consequent currency weakening, US markets correcting from the current high are all events that are likely to make markets volatile in the near to medium term.

What's your take on valuation right now? Do you think mid-caps are broadly overvalued? Do the risks of mid-caps outweigh returns potential at this stage?
From a price-to-earning standpoint, markets are fairly valued but on price-to-book standpoint, market at current remains at attractive levels. On a trailing basis, we see the P/B of Nifty at 2.8 times, which is similar to Nifty's valuation in 2003. On P/E basis, we are still at a discount, as earnings have been suppressed over last three years.

Over the past three years, midcap and small cap space have seen a good run and therefore may not offer deep value at levels. However, they continue to hold promise as the earnings recovery cycle plays out.

Are we in a stock picker's market now? What sectors do you see outperforming others?
At different point in time, different sectors prove to be market leaders. For instance, consumption was the theme for the last five years. Going forward, we see sectors levered to economic recovery such as infrastructure, banking and construction doing well. Given the robustness in economic recovery in China, Japan and US, it likely even global cyclical sectors like IT & Metals could do well. So, one could be overweight on domestic and global cyclical sectors for creating wealth over next five years.

Investors who deployed moneys when the markets corrected heavily late last year are already sitting on decent profits. Would you say it's time to take some profits off the top at this stage?
As a fund house, we are positive on equities from a two to three-year perspective. Therefore, we would recommend investors with long-term investment horizon to stay invested for at least the next three years.

Where do you see Banks and NBFC headed in the next three years? Do you see them emerging stronger from an NPA cycle at this stage, or are troubled times still ahead?
Improving macro-economic fundamentals of the country can have a positive cascading effect on the Banking and NBFC sector, as a whole. As the demand and corporate capex picks up, we are likely to see better credit growth. The government is also pushing the growth in capex cycle.

Banks have been building a strong cushion of provisioning for NPAs over last three years, which is why the profitability has been subdued. But now, with asset repayments on course and non-performing asset cycle having peaked out, the provisioning requirement will ease from hereon. Therefore, we may see significant increase in profitability of the banking sector, especially corporate banks.

Tell us a bit about ICICI Prudential Child Care Plan… What specific strategies do you follow for this fund that make it suitable for planning for one's child's goals, such as higher studies?
ICICI Prudential Child Care Plan is an investment solution designed specially to help investors cater to the educational aspirations of their kids. Within the Child Care Plan, there are two schemes- Gift & Study. While Gift Plan (higher allocation to equity) helps achieve financial goals for children in their formative years, Study Plan (higher allocation to debt) helps to invest for Children in the age group of 13- 17 years for higher studies.

For a child in this age bracket, large expenses especially for education may be just around the corner and the time horizon is shorter. Therefore, the scheme aims to invest 75-100% in fixed income. The balance up to 25% is invested in equity, which seeks to offer growth and dynamism.

Lastly, what would your broad advice to retail investors who need to deploy a lump sum of money be right now? Are STP's a good idea?
Investors should continue with their SIPs into core equity funds and for those considering lumpsum investment can opt for dynamic asset allocation funds. This is because from a near to medium term perspective, volatility is likely to prevail due to global factors. In case of aggressive investors, they could consider thematic funds with focus on infrastructure.