The US Fed rate hike and rising cases of new Covid variants are among the major risks for the domestic equity market in 2022. Business Today caught up with S Naren, ED & CIO, ICICI Prudential AMC to understand which sectors may deliver a solid return to investors despite the volatility and what strategy one should adopt to make the maximum from the New Year.
BT: What kind of return do you expect from the stock market in 2022?
S Naren: Over the last decade, easy liquidity conditions and rate cuts by global central banks had created a conducive environment for robust equity market performance. However, it has now been indicated that global central banks could move towards a gradual withdrawal of excess liquidity from markets. At a time when valuations are relatively high, this could lead to a spike in market volatility. Another development that could impact the market is news related to Covid strains.
Amidst all this, the positive from an India point of view is that the business cycle has largely turned favourable. Corporates have deleveraged, government fiscal deficit is under control and the non-performing loans cycle of the financial sector too is under control. All these are major positives at this point of time.
What this translates to is that the period of easy money making across asset classes is largely behind us. In such a setting, investors should focus on adhering to asset allocation.
BT: Which sectors will be on your watch list in the New Year?
S Naren: We are positive on some of the domestic facing sectors such as autos and banks which appear to be fairly valued. Telecom is another sector that we believe could deliver on account of multi-year upcycle driven by changing usage behaviour, consolidating industry structure, ARPU recovery and deleveraging of the balance sheet as capex intensity for the sector will come down. Among the defensives, post the correction seen in pharma space, we believe pharma is reasonably priced. We expect valuations of the domestic pharma segment to remain strong as M&A activity/PE deals continue to remain healthy. Margin improvement on the back of cost optimisation is expected in the quarters ahead. Utilities is another pocket we are positive on.
BT: What could be the biggest investment theme for the next year? How should one play it?
S Naren: With the likely withdrawal of stimulus measures coupled with the dynamic environment in global and domestic markets, one may require more active management to navigate the equity market. So, a combination of active management and multi-asset strategies is likely to provide a better outcome in the near term.
Through multi-asset strategy, an investor gets access to diverse asset classes such as equity, debt, gold and international equities, all within a single fund. We have recently launched ICICI Prudential Passive Multi-Asset Fund of Funds, which provides exposure to all of the asset classes I mentioned. Since this is passively managed, offering investments across asset classes shall be through ETFs/ index funds. The scheme is capable of investing in any ETFs/ index fund launched by any other mutual fund in India. For international equity exposure, the universe consists of 30 well researched global ETFs that invest across globe/country-specific and theme-specific ETFs. Through this fund, we aim to offer a simple investment solution providing a blend of various asset classes.
BT: Do you think midcaps and smallcaps can continue to outdo large caps in 2022? Why or why not?
S Naren: Largecaps is likely to be a laggard till the time FII selling continues. But from a medium-term point of view, large caps are much more attractive than mid and small caps.
BT: Name three factors that would drive the market direction going ahead?
S Naren: We have been big believers that global central banks fixing up interest rates are the most important factor which will drive equity returns for the next few years. From a macro perspective, inflation could persist but should not be seen as a major risk. Historically, when inflation is at manageable levels, it provides a boost to economic activity. At such times, businesses tend to sell goods at a faster pace.
BT: Which are the two big risks that can drag the market in 2022?
S Naren: The quantum and pace of the US Fed rate hike and severity of new Covid variants are potential factors that can weigh on markets.
BT: What should be the right portfolio mix considering the present market scenario?
S Naren: Rather than focusing on a single asset class, opt for strategies that allow an investor to take exposure to multiple asset classes. In case if you are considering an equity-related investment, opt for scheme categories that have the flexibility to invest across market capitalisation and themes.
BT: Which type of stocks do you think one can buy in case of any correction?
S Naren: Currently, the mood among retail investors is buoyant. Investors are opting for aggressively priced IPOs without looking into factors like trailing price-to-earnings, trailing price-to-book, dividend yield and ROE before investing. This is a worrying development. If opting for direct investing, then it is advisable to invest in names that are profitable and fundamentally strong.
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