We like the Indian story from a medium-to-long-term perspective as it has growth drivers on its side and can continue to grow at mid to high single digits on a real time basis over the next couple of decades,” Jitendra Arora, Executive Vice President & Senior Equity Fund Manager at ICICI Prudential Life Insurance said in an interview to Moneycontrol.
In the short term, ICICI Prudential expects markets to remain volatile and consolidate over the next couple of quarters as it awaits clarity on the geopolitical situation, impact of withdrawal of stimulus by policyholders and steady demand as Covid becomes more routine than an exception, but ruled out a major correction (more than 20 percent) in the markets from the current levels, said Jitendra Arora.
Considering the macro issues, is there any possibility of major price correction in coming days?
Indian markets are trading at a premium to their peers. Premium of MSCI India P/E (price-to-earnings) to MSCI Emerging Markets (EM) is close to all-time highs. The MSCI India P/E is currently at around 85 percent premium to the MSCI EM compared to an average premium of around 45 percent over last 15-16 years.
However, if we dig a little deeper and see what is driving this is essentially a huge premium for Indian markets as compared to the Chinese markets. The P/E for MSCI India is currently at more than 110 percent premium to the P/E for MSCI China. For the last 15 years the same has been at an average of 43 percent.
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So, even though the Indian market is trading at a premium to its peers but it is still not at a historical high if we see it ex-China. Investors have traded Indian market at a premium to emerging markets as they see it as a large market that has the potential to deliver double-digit nominal growth over the next decade. We don’t see that changing quickly unless we falter big time on our growth.
We are in an extremely uncertain environment globally as of now. The investment environment was challenging due to existing issues like inflation, withdrawal of policy stimulus and liquidity, the geopolitical situation in Ukraine. This along with a surge in Covid in China has added to that uncertainty.
However, in such a challenging situation the Indian markets have withstood a surge in FII selling with a big inflow from domestic investors. Going forward, if we see some slowdown in domestic flows or the flows getting absorbed by large IPOs then we may see some correction in the Nifty50. However, we are not looking at a major correction (more than 20 percent) in the markets from the current levels.
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Given several issues globally, what do you want to pick for your portfolio at this point of time?
Given the extreme uncertainty in the global environment we are focusing on investing in businesses that have limited direct impact on account of the uncertainty or have been priced in reasonably for these issues. The endeavour is to pick up stocks that are likely to deliver healthy earnings growth over the next 3-5 years from the current levels and are priced appropriately.
We like the banking space in India as we believe that it can continue to grow at double digits over the next few years given that credit has a lot of potential to grow as we remain an underpenetrated market. We also like some secular domestic consumption players that may have tailwinds as the economy emerges out of Covid-19 and provides short term tailwinds over and above the secular growth potential.
We also like the beneficiaries of the potential global supply chain realignment that may happen as companies look to diversify their sources for raw materials as well as intermediate and finished products or as they manufacture onshore versus offshore.
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DIIs including retail investors have been supporting the market, though on the other side FIIs keep selling Indian equities. Do you think this scenario will continue in coming quarters considering current macro issues?
FIIs have been sellers in the Indian markets over the last couple of quarters. In fact FIIs have been net sellers for more than $ 17 billion while the DIIs have been buyers of more than $ 29.5 billion in FY2022. This is what held the Indian markets in good stead over the last 12 months.
We are expecting FIIs to remain sellers in the market as India continues to outperform its peers and that may lead to see some rotation along with the fact that global liquidity is likely to go down as central banks start shrinking their balance sheets.
Domestic inflows remain steady in the form of SIPs and ULIPs along with direct retain flows in the markets. However, in case there is a sharp slowdown in global growth then the central bankers may be forced to pause withdrawal of liquidity thus affecting this trend.
What is your great advice to investors in the current equity market environment that is dealing with several macro issues and have been rangebound for couple of quarters now?
We like the Indian story from a medium to long term perspective as it has growth drivers on its side and can continue to grow at mid to high single digits on a real time basis over the next couple of decades. This should lead to healthy growth in corporate earnings over that period. This should also drive domestic savings in equity and given the fact that we have the size to absorb a large pool of capital we are likely to remain a destination of choice for foreign investors as well.
So long term investors should continue with their systematic investments in the markets with a 5-10 years perspective. In the short term, we expect markets to remain volatile and consolidate over the next couple of quarters as it awaits clarity on the geopolitical situation, impact of withdrawal of stimulus by policyholders and steady demand as Covid becomes more routine than an exception.
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