‘It is a good time to look at non-us, global equity investing’

As the economy recuperates from the effects of the Covid-triggered lockdown, NIMESH SHAH, managing director and chief executive officer at ICICI Prudential AMC, tells Puneet Wadhwa in an interview that investor sentiment should further improve and pave the way for fresh inflows into equity mutual fund schemes. Edited excerpts:

What is your view of how the markets have played out over the last few weeks?

The markets may look overvalued on the surface given the excess liquidity that is leading to a price rally in growth stocks. During 19921994, 2003-2008, and 2014-2017, a similar trend had played out. The divergence between growth and value, taken on a calendar year-to-date (CYTD) performance spread basis is the largest ever and exceeds that seen in the run-up to the 2000 dotcom bubble. This makes value as a theme relatively attractive to growth. Moreover, the dollar may depreciate further due to ample liquidity. We believe that value as a theme is better placed than growth.

ICICI Prudential had been positive on cyclicals. What’s your strategy?

We have been positive on sectors, such as power, telecom, and metals

& mining, for some time now. Many frontline companies in each of these pockets were available at prices below their intrinsic value. As the economy recovers, a number of these companies are poised to do well. We are also positive on banks from a five-year view, since the competition posed by NBFCS has come down and, dust will likely settle over the next six months on moratorium-related issues. The other opportunity is to invest in good dividend-paying firms, which are not leveraged at this point, or even in a mutual fund scheme, which focuses on having a high dividend yield from stable firms.

Investors are also looking at foreign markets for diversification. Do you see this trend picking up?

In the past few years, investors have warmed up to investing in developed markets through equity mutual funds. From an investor’s perspective, the target market has largely been the US, where technology names are driving the indices to new highs. But relative to domestic equities, the interest has not been sizeable, although the past performance of such funds has been encouraging. Investors should be mindful of the fact the US market is heading to bubble zone and a correction remains imminent. For the US rally to sustain, growth needs to pick up. It is a good time to look at non-us, global equity investing.

Can the rally in metals sustain?

Neither the consumer durables nor the auto industry can grow without metals, where most companies are trading at single-digit price-to-earnings (PE) multiples. For nearly a decade, weak demand, weak global prices, and a restrictive regulatory environment have resulted in weak earnings and stretched balance sheets. This, coupled with an easy monetary policy stance of the central banks, may create the base for the next commodity upcycle in India.

What could be a fixed-income strategy?

Over three years, we have been bullish on the fixed income segment. The quantum of rate cuts may come down as compared to what we have seen in the past couple of years. Hence, an accrual strategy is best placed.