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    Easy phase to make easy money is over; be aware of risk: S Naren

    Synopsis

    Large caps appear clearly much better than small and midcaps, says the CIO of ICICI Pru AMC

    S-NarenET Now
    "There is reason for volatility both globally and locally over the next two years, investors should be cognisant of risk."
    Talking to ET Now, S Naren, CIO, ICICI Prudential AMC, says recommending people to invest both in debt and equity or choose categories like balanced advantage fund which invests in debt and equity together.

    Edited excerpts:

    What do you make of the correction and the volatility in the market -- is it Trump, is it yields or is it the tariff war?

    Our belief has been that markets were not cheap. Everyone wants markets to keep going up without any corrections but that was a reflection that the equity market always carries with it some volatility risk. Even after the correction, markets, particularly on the small and midcap side, are not cheap. On the large-cap side, while valuations are more reasonable, in the next two years, there is enough scope for volatility both globally and locally.

    You mention that pockets within small and midcap stocks are still richly valued. Will it be fair to assume that we are not done with the pain yet and there is more selling coming in mid and small-cap stocks?

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    People cannot predict such things accurately and that is the reason why investing is such an enjoyable activity. There is nothing called perfect certainty. The reality is that the markets are still not cheap on the small and midcap side. We can have bouts of volatility over the next two years due to both global reasons -- interest rates going up in the western world as well as local reasons for volatility over the next two years. That is why, as a mutual fund, we have been trying to recommend people to invest both in debt and equity or choose categories like balanced advantage fund which invest both in debt and equity together.


    On the market landscape, does the recent fate of the bypolls in Rajasthan and UP and Bihar create a niggling worry for the markets? You cannot take a BJP victory in 2019 for granted. Do you think that is an overhang and it is on the mind of the markets?

    I do not talk specifically on politics but clearly if there is reason for volatility both globally and locally over the next two years, investors should be cognisant of risk.

    For an equity investor, what kind of opportunities do you see in this market considering that you believe that it is going to be a choppy ride?

    Large caps appear clearly much better than small and mid-caps. The sectors which are focused on exports and the sectors where there are low implied growth assumptions like power utilities are better than some of the sectors which are very sensitive at this point of time.

    From the equity market point of view, we are not at a phase at this point of time when you should take excessive risk because for that you need fear and valuations being cheap. In my opinion, valuations are not cheap and that is the reason the approach in equity has to be more measured than what I would believe.

    You have been an advocate of metal and tech stocks. Both these groups have done rather well. 2017 was great for metals and so far, 2018 has turned out to be great for IT companies. Do you think it is time to rethink anything which has got to do with global trade?

    In the metal sector, there are a number of companies which have deleveraged over the last five years and now their debt to equity ratios are much lower. Many of them are actually through with their capex phase. So, they are in a deleveraging environment. We believe that once you are in a phase where there is good free cash flow, that stock tends to be more defensive, particularly in the six month to one year timeframe. That’s why we are reasonably positive on the metal sector and do not expect that the sector can be as volatile as what it was three years back, unless you are investing in extremely leveraged companies.

    You have always been a contra investor. Given that the markets have been volatile, where are you picking your spots? Which is the sector the markets are not able to understand or where could business be at an inflexion point?

    There are two contrarian opportunities clearly in accrual funds at this point of time. Second, though not contrarian, our good risk return trade-offs are in the hybrid funds at this point of time and categories like balanced advantage. These are the two areas where we feel more comfortable at this point of time than any other category.

    Within equities, are there any contra opportunities that you spot?

    We have been overweight on power utilities. We have been overweight on upstream oil and we have been reasonably positive on the downstream oil companies. As a strategy, invest in companies where the price to earnings ratio is low, dividend yield is high and there is not too much leverage. That is our favourite metric at this point of time for the next few years.

    Do you think that the pain is already in the price, given the kind of sharp correction that we have already witnessed for the PSU banks or would you say that there is still more to it given that every day we see new skeletons emerging out of the closet?

    We have been selective in the sector for the last five years. We continue to believe one has to be selective and in my investment principles when you invest in any leveraged sector, you actually need to be careful of the weightages. Leveraged sectors always carry higher risk than non-leveraged sectors and that is how we like to see the sector. We would be selectively positive but it cannot be a very big part of any investors portfolio.


    What is the big risk – local or global? Do you think the risk for our markets is not going to come from domestic front but is going to be global in nature?

    The reason for recommending investing defensively at this point of time is all the risk that you mentioned are risk over the next few years. Till at least some of these factors are already done with, there is potential for risk coming out of all the four reasons.

    If you look at the February correction, it coincided with the big fall on one day in US stock market. I would say it is always going to be all these factors put together. But having said that, the easy phase to make easy money appears to be over.




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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