Jitendra Arora, Executive Vice President & Senior Equity Fund Manager at ICICI Prudential Life Insurance Company, advises investors to follow an approach of ‘time in the market’ and not ‘timing the market’.
“The market is expensive in terms of valuations, with respect to its past. Thus, one may avoid lump sum amounts with a horizon of less than 2-3 years at this stage,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Jitendra, who has been with ICICI Prudential Life Insurance for over 20 years, said that, over the last 10 years, indices comprising companies with better ESG (environmental, social and governance) compliance have outperformed normal indices, globally as well as in India.
This is likely to continue as more money flows into ESG-focused funds, he feels.
Do you think it is an expensive market? Can you explain the parameters that say the market is expensive?
Jitendra: There are various measures used to determine whether a market is cheap or expensive. The price-to-earnings (P/E) ratio is the most commonly used parameter by investors and analysts to determine stock valuation. Essentially, the P/E shows what investors are willing to pay for a stock, based on its past or future earnings.
Analysts usually look at the 12 months forward P/E, i.e., price of a security on a given day, divided by the expected earnings for the same security for a period ending one year from that day. P/E for an index is calculated in a similar manner.
For instance, as per the Bloomberg data tracked by us, the Nifty50 is currently trading at a one-year forward P/E of around 22 times (August 31, 2021), compared to a one-year forward P/E of around 20.5 times a year back (August 31, 2020).
Its average one-year forward P/E for the last 10 years (ending August 31, 2021) is estimated to be around 16 times. Thus, one can say that the markets are trading rich from their trading history.
But one must keep in mind that this does not factor in changes in the index constituents, interest rate environment, valuation of alternative assets etc. Adjusting for those, the markets may not be that expensive. In addition, one can also look at other parameters like price/sales and EV/EBITDA to understand market valuations.
The September 2021 quarter earnings season will begin next month. What are your broad earnings expectations?
Jitendra: Earnings have been very resilient for listed Indian corporates despite the COVID-19 environment over the last 18 months. The Nifty50 constituents’ earnings are expected to grow 26-28 percent in Q2FY2022 over Q2FY2021. Sectors like metals, cement, technology and banking are likely to show healthy growth, whereas pharmaceuticals and autos are likely to disappoint on earnings growth.
Given that the market is at record high levels, with the Nifty50 moving towards the 18,000-mark and the BSE Sensex hitting 60,000 levels, what should be the strategy one should follow?
Jitendra: What one must keep in mind is that the long-term earnings growth for corporate India is likely to remain healthy as they track the long-term nominal GDP growth.
With the government efforts to improve domestic manufacturing through Production-Linked Incentive (PLI) schemes, we see manufacturing getting a bigger push, in addition to services. This may lead to a higher GDP growth over the next few years.
Corporate earnings, on an aggregate, should grow in double digits over the next decade and that should translate into market returns. So, systematic investments, based on one’s asset allocation, is the right way to invest in the markets.
What are the pockets one can look for investments right now which could give good returns in the coming years?
Jitendra: We will have many investment opportunities. Stocks that play the consumption theme (housing/durables), investment needs (PLI), export (chemicals/pharma) are all likely to be rewarding over the long term.
The realty sector rallied more than 35 percent in the last one month. What are the key reasons for the rally? Do you think one should be cautious now or one can still invest at current levels? Is it a multibagger story?
Jitendra: Realty is typically a cyclical sector, with demand being affected by home prices, income of buyers and interest rates (given the mortgage involved). The sector saw some inventory absorption over the last 18 months, aided by the need for better housing, lower interest rates, stamp duty, limited launches etc.
Future demand will be aided by job creation, especially in the IT and manufacturing sectors, given the industry consolidation happening on the ground.
With multibagger gains in the benchmark indices and broader markets from March 2020 lows, should one reduce the exposure to equity, to some extent now?
Jitendra: Exposure to equity as part of one’s portfolio is a function of various aspects like time horizon, risk appetite, age etc. While markets have delivered 125 percent returns from last year’s bottom, if we look at the market return for the last 10 years, it has delivered an annualised return of 13 percent.
This is more or less in line with the long-term earnings growth. So, one should not get swayed by short-term returns in the market. Stick to long-term asset allocation, instead.
We believe investors should follow the approach of time in the market and not timing the market. As discussed, the market is expensive in terms of valuations, with respect to its past performance. Thus, one may avoid lump sum amounts with a horizon of less than 2-3 years at this stage. Regular systemic investment in equity markets may be a better investment strategy for the current market.
What is your investment mantra for new investors? Why should investors invest in companies that are ESG- (environmental, social and governance) compliant?
Jitendra: We always advocate that one should be very clear in asset allocation. This should be based on age, investment horizon, life stage, disposable income etc. After determining this asset allocation, one should regularly and systematically invest in line with the same to achieve the investment goals.
ESG-compliance is gaining focus across the globe as governments now realise the impact of climate change and are taking steps to restrict the global increase of temperatures by an average of 1.5 degrees Celsius by 2050 in line with the Paris Agreement.
According to Global Sustainable Investment Alliance (GSIA) estimates, more than $ 35 trillion worth of global assets follow some kind of ESG criteria in investments. We believe this will keep increasing as corporates as well as regulators become more concerned about ESG compliance.
Over the last 10 years, indices comprising companies with better ESG compliance have outperformed normal indices, globally as well as in India. This is likely to continue as more money flows into ESG-focused funds, which ultimately is invested in companies with better ESG practices.
Do you think the Indian stock markets should be worried about the Federal Reserve’s expected tapering? Will the affect FII flow to India?
Jitendra: The Fed tapering will reduce liquidity infusion into global markets. While the Fed is likely to start tapering this year, other large central banks like the European Central Bank (ECB) and Bank of Japan (BoJ) will continue expanding their balance sheets. Therefore, overall liquidity infusion will continue in the global markets, albeit at a much slower pace.
This may reduce the pace of monetary expansion and impact asset prices. As a result, FII flows may get affected over the short term. However, long-term flows will be determined by India’s attractiveness as an economic destination. We believe India has strong economic fundamentals at this point in time and offers an attractive long-term investment opportunity to FIIs.
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