Gautam Sinha Roy, SVP & Fund Manager, ICICI Prudential Life Insurance says that he will continue to have a sector-agnostic, bottom-up approach and companies with a) stronger balance sheet, b) better brands, and c) more evolved digital adoption will come out as winners in the post-Covid-19 recovery phase.
Roy has over 18 years of rich and varied experience, predominantly in equity research and fund management. Prior to joining ICICI Prudential Life Insurance in 2019, Gautam was associated with Motilal Oswal Financial Services, Mirae Asset Global Investment (India) and IIFL Capital Pte Ltd, Singapore.
In an interview with Moneycontrol’s Kshitij Anand, Roy said that a healthy mix of large, mid and small caps is advisable from a portfolio perspective. Volatility-averse investors might choose to have a higher skew towards large caps and larger mid-caps.
Edited excerpts:
Q) The first six months of 2021 were exciting at least from a stock market’s point of view where a rising tide of liquidity took all boats higher. Do you think we will see a repeat of 1H2021 in the second half as well?
A) The first six months of 2021 were marked by high flows, surprising improvement in earnings, opening-up of economies (also driven by vaccination in many countries), and an unprecedented rally in metal prices. In that sense, it was a unique phase.
Going forward, the liquidity environment is unlikely to improve further. Corporate earnings will have to climb a high wall of elevated expectations in H2-FY22 and beyond.
Other factors, like open-up trades, will also undergo a reality check. So, while there are no negative triggers, we would expect a more range-bound market, with bouts of volatility.
The volatility could be driven by changes in expectations on the course of the US monetary policy and the pace of economic recovery.
Q) Which sectors are likely to lead the next leg of the rally on D-Street?
A) We saw broad-based sectoral participation in markets in the past year. Going forward, the leaders and laggards will be determined more by the pace of economic recovery.
We will continue to have a sector-agnostic, bottom-up approach to our portfolios. Companies with a) stronger balance sheets, b) better brands, and c) more evolved digital adoption will come out as winners in the post-Covid-19 recovery phase.
For example, larger banks will be in a position of strength. Some of them are also benefiting from a tailwind of a recovery in the NPA cycle. Digital businesses and there enablers will do well.
As the capex cycle restarts led by domestic manufacturing set-ups and metals, industrials will benefit. Also, consumer staples should compound at a healthy rate.
Q) What is your views on the domestic economy-related stocks as the economy is on the revival path amid unlock announced by various state governments?
A) We shall look at the recovery in two parts or phases: the normalisation phase (which includes pent-up demand), and sustained growth trajectory post normalisation.
We find that the market has priced in normalisation largely. The returns from here will depend on the growth trajectory of the broader economy and individual stocks within that, post normalisation.
Q) What are your cash levels at this point? Do you foresee some consolidation and then can be later deployed at lower levels?
A) We refrain from taking cash or asset allocation calls, broadly speaking. Our products enable the investing customer to do that, if and when they wish.
Our products are by design long-term investment products. So, tactical cash positions for some short-term volatility might not be optimal. This will become important when we expect sharper market corrections.
Q) Do you think there is further room for rerating in small & midcaps?
A) Small caps have seen a rerating over the last few months and now are leaving little room for rerating on the upside in the medium term. The returns from here will be driven by earnings growth, which will be stronger if the economy sustains a higher growth rate.
One unique aspect is that some of these companies are gaining market share from the smaller (sometime unorganised) competition, which has been disrupted due to covid-19 led challenges. Import substitution, or a shift to domestic manufacturing, is also a tailwind for certain businesses.
Q) What should be the strategy of investors for the next six months – go overweight on large caps, and underweight on Midcap and small caps?
A) Investors should look at opportunities across the market cap spectrum with an open mind. One can look to buy companies with strong fundamentals and a high prospective growth trajectory.
A healthy mix of large, mid, and small caps is advisable from a portfolio perspective. Volatility-averse investors might choose to have a higher skew towards large caps and larger mid-caps.
The other aspect is that, especially as market valuations become richer, it is important to invest with a long-term perspective, with a tolerance for any short-term volatility, which can ensue.
Q) Most analysts are complaining about Nifty valuations which are above long-term averages. What are your views?
A) We find that while the Nifty valuations have gone up, they are on the back of elevated earnings delivery and expectations. The rise in commodity prices, led by metals is a big contributor to elevated earnings.So is higher inflation (helping nominal earnings) and lesser provisioning requirements in corporate lending books of banks. While this is playing out currently, we will watch out for sustainability of some of these earnings drivers.We also find pockets of the market where the post-lock-down earnings delivery has been high, driven by pent-up demand and cost rationalization.We will be mindful of such stocks if valuations are extrapolating sustained high growth, which might not come through.
Q) What is your investment mantra?
A) We are looking out for companies that can generate superior returns on invested capital and deliver high earnings growth, in a sustained manner.
Secondly, equity is by nature a long-term investment class, hence invest with a multi-year horizon. Thirdly, equity is also volatile, hence one has to be patient and look to invest with sufficient margin of safety.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
