What is the reason for the fall in stock prices?
The sharp rally over the past couple of months has been largely on account of three factors—availability of tremendous liquidity globally (leading to higher risk appetite), signs of economic recovery and formation of a stable government. However, with the run-up being so steep and no major positive surprise during the October quarterly earnings season, we are witnessing some profit-taking.
Our strategy is to take longer investment calls rather than pure liquidity-based calls. Most of the macro-economic data is positive compared with what it was a year ago. Due to the current market correction, valuations are moving closer to the fair value zone. This will present a good opportunity for long-term investors. We are optimistic over the medium to long term.
Where do you see equity markets heading?
The market may consolidate around the current levels in the short term as we have seen a good run-up in the past six months. In the long term, however, we expect the equity markets to deliver returns of 13-15 per cent per annum, which is in line with the likely nominal GDP growth. We expect domestic themes (both consumptionand investment-oriented) to outperform exportoriented themes.
What's your approach given the current valuations?
The liquidity-driven rally has led to some sectors being overvalued. The recent market correction will hopefully make valuations more reasonable, giving us an opportunity to consider some of them.
Which sectors are worth investing in?
We have adopted a balanced and consistent approach in focusing on the fundamentals of the companies/sectors and their valuations. Given the long-term nature of the money that we manage, we tend to take deeper calls on the market. As of now, we see opportunities in sectors such as financials, engineering, consumer products and upstream oil, among others.
What should retail investors do in the current market?
We have always advocated that irrespective of market valuations, investors should focus on maintaining a suitable asset allocation depending on their age, income level and risk appetite. It makes sense for them to undertake systematic investing in equity according to the desired asset allocation.
Is there a risk that the upside may be capped?
Given the steep rise in the past six months, valuations may have moved to the above fair value zone for some stocks/sectors. This may cause the markets to consolidate for some time at the current levels, which is possibly what we are witnessing. However, this does not alter the long-term growth story of the country.
(Manish Kumar is the head of Investments, ICICI Prudential Life)