Daily Voice | Stay cautious as market may appear rich, but long-term story intact: Jitendra Arora of ICICI Prudential Life Insurance

Market Outlook

Roller coaster ride in markets in the last 12 months has been one of the greatest learnings that one can get in a very short span of time and has been a very valuable lesson for me, Jitendra Arora, Executive Vice President & Senior Equity Fund Manager – Investments, ICICI Prudential Life Insurance said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) What a ride it has been for the bulls – both Sensex and Nifty50 climbed crucial psychological levels after the Budget 2021. What is the way ahead of markets?

A) Calendar 2020 has been a roller coaster year for markets where we saw a 40 percent correction in a month followed by a rally that led to fresh highs for domestic as well as global markets.

A demand shock (Covid-19) followed by big fiscal and monetary stimulus led to a sharp fall and quick recovery in the markets. In the process we have seen huge liquidity and loose financial conditions leading to a rally beyond anyone would have thought possible back in March 2020.

We have two components in favour of stock markets that drive performance – Earnings and Liquidity. Thus, though markets may appear rich as of now and may warrant some caution, we are positive from a long-term perspective.

Q) The underline assumption in the equity market is a recovery in the economy. We are seeing some green shoots in the economy but do you see any risks to the ongoing rally both local and global?

A) We have seen the economy recover pretty sharply from the Covid-19 related lockdowns and this has percolated to corporate earnings, where we saw a lot of companies delivering very strong earnings.

As a result, stocks have rallied and are now discounting the earnings momentum to continue. This expectation may not be met and that represents a big risk for markets going forward.

Apart from that ample liquidity conditions are also driving the risk appetite higher and any big change in liquidity conditions represents another risk for the markets, both local and global.

Q) The December earnings seasons cemented the fact that recovery is underway. Data suggests that over 70% of the Nifty companies that have reported earnings in Jan’21 have beaten estimates. Do you see more upgrades to the earnings cycle than downgrades?

A) Corporate earnings were driven by cyclical and characterized by strong demand improvement, coupled with cost optimization.

Earnings growth and upgrades have been broad-based as all mainstream sectors have beaten consensus expectations. We believe the government’s focus on fiscal expansion and Capex augurs well for the revival of the long-anticipated private investment cycle.

If the government policies like fiscal expansion, PLI schemes succeed in catalysing private capex, we expect the earnings momentum to sustain with a further revival in the economy, the containment of the Covid-19 pandemic, and the benefit of a low base ahead.

Q) Common argument which is given is premium valuations are sustainable in light of economic and earnings upcycle. Earnings upgrades would support and drive valuations. Do you agree?

A) Premium valuations are a function of earnings upgrades, liquidity, and lack of competing opportunities for investments (low-interest rates making bonds less attractive).

Globally, liquidity and a low-interest rate scenario will stay for some time in our view resulting in premium valuations. However, earnings are the most fundamental factor in driving stock markets over a longer period of time.

The market is pricing in strong earnings growth to continue and if that doesn’t come through then we may see some steep correction.

Q) So where are the opportunities in the market which investors can grab post Budget 2021?

A) We have seen financials and public sector stocks rally smartly post the budget as they were pockets of value in the broader market context.

The sectors that have positive narratives going forward or strong domestic drivers will continue to perform. Global Sourcing Diversification in addition to China, coupled with Production Linked Incentive (PLI) schemes for various sectors are throwing up interesting opportunities that will have growth tailwinds for a long period of time.

Credit and other financial services in India are still underpenetrated in the global context, thus presenting opportunities for long-term growth and value creation.

Q) Retail investors have consistently pulled out money from MF and January was no exception but SIPs continue. What does the trend suggests – does it mean that retail investors who can manage money are using the trading channels to route the money or there is a larger trust issue?

A) It will be difficult for us to draw any conclusions regarding individual behaviour. Investors continue to regularly apportion funds towards building their savings pool and withdrawal of funds on account of profit booking or change in asset allocation has little to do with trust.

Q) How should investors invest money – go the SIP way or make a diversified portfolio of 15-20 stocks or a mix of both to take leverage of growth push seen in the economy?

A) Retail investors may not have the time needed and access to information required to track stocks on a regular basis as done by a professional investment manager.

Investors have a plethora of options they can choose from for e.g. ULIPs offer an excellent route to build a savings pool over the long-term.

I believe that they should entrust their money to professional investment managers. Thus regular and systematic investments are the right way to invest in the markets.

Q) Sensex climbed historic levels of 52000 while Nifty50 broke above 15400 – how do you chart your journey in markets and any instance which you would like to share with your readers when you got stuck but eventually got through?

A) Markets are the greatest tutors to all investors as there is no winning formula across time periods and cycles. A fund manager has to continuously evolve and be willing to be humbled from time to time in their investing journey.

The roller coaster ride in markets in the last 12 months has been one of the greatest learnings that one can get in a very short span of time and has been a very valuable lesson for me.

Q) Your checklist to investors on how to pick stocks in 2021 or post COVID as the pandemic changed a lot of things, the way business work, the metrics etc.

A) The checklist for stocks stays the same. It needs sustainable and growing earnings, efficient delivery of these earnings, efficient use of earnings delivered to fund future growth or returning capital to investors and reasonable valuations.

It’s just that different stocks lack one or more of these from time to time. Good companies use events like the pandemic to make their business more robust and sustainable through the identification of growth opportunities or cutting costs and becoming more competitive.

A lot of companies have done that and it’s evident in their earnings performance. We just need to see how many of them do it on a sustainable basis as they will be the winners in times to come.

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