Businessworld organised its maiden Mutual Fund India Summit at Trident Hotel, Mumbai earlier this month. Attended by over 300 IFA's, the daylong session was replete with valuable insights and commentaries from industry stalwarts.
S. Naren, Chief Investment Officer of ICICI Prudential Asset Management Company, took out valuable time from his busy day to address the attendees on his outlook on the markets. Naren is one of India's foremost and well respected money managers.
"Market Outlook is most difficult to give", began Naren. He stated his belief that most short term market movements happen because of global and not local reasons. He also mentioned that from a macroeconomic perspective, India is very well placed compared to its global peers.
It is Naren's view that over the next two years, capacity utilization is likely to go up; leading to an increase in earnings, and this would lend a fillip to stock prices. His base view is that economic cycles will play out, resulting in improved earnings in the next two years.
Naren's base framework recognizes valuations, but also places emphasis on fundamentals, sentiment and earnings growth. Citing the example of 2007, he said "It is when earnings growth is very high that you need to worry - not when earnings growth is low, like it is today"
According to Naren, huge FII inflows and domestic inflows into local mutual funds, coupled with high earnings growth is actually a trend that precedes market downturns.
He re-stated his belief in equities as an asset class over the next two years, while at the same time observing that markets are no longer cheap at this point. However, Naren cautioned about looking at the market through the single lens of Price to Earnings (P/E) ratio. For this reason, ICICI Prudential utilizes three other indicators alongside P/E ratio, which indicate that the markets are in a 'fair value zone' at present.
"To make big returns in the market, one needs to invest in panicked markets, and when valuations are cheap", he advised, indicating that investors can expect 'moderate' returns from equities going forward.
Naren feels that the fundamentals of the economy have improved drastically over the past few years. He firmly believes that 'Current Account Deficit' to be the primary indicator of the overall economic health of a country, and stated that the CAD to GDP ratio has improved from -4.8 per cent to -0.1 per cent between 2013 t0 2016.
"The returns that western investors expect have also come down drastically, which is positive for equities", said Naren, citing the example of a 40 year Swiss Bond that provides a zero return. He also stated that there are no clear cut economic theories to predict the long term effects of a de-growing population or zero interest rates on an economy; and so in that respect, Global Markets are in many ways entering into a Greenfield territory.
On the debt front, Naren believes that the bottom of the interest rate cycle should be witnessed sometime in the next year or so. However, he mentioned that there is scope for significant reductions in rates, if real estate were to deleverage. "If Real Estate deleverages, we can even have interest rates of 5 per cent or so", said Naren, adding that we may be in the last 6 months of good returns from debt funds, unless the deleveraging in real estate actually comes through.
Summing up his valuable discussion, Naren left the audience with a few key messages. Firstly, the economic cycle is not at its peak as yet, and markets will continue to move up (with volatility) over the next two years. Secondly, earnings growth is likely to trigger these up-moves. Thirdly, he advised that one needs to buy equities before earnings improve, as the opportunities are likely to disappear quickly ones they do.
The talk was concluded with a few insightful questions from the audience.
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