Consider 2023 as a year to invest for long term, says Sankaran Naren

Markets have entered 2023-24 (FY24) on a cautious note. Sankaran Naren, executive director and chief investment officer at ICICI Prudential Asset Management Company, in conversation with Puneet Wadhwa, says that leadership — in case markets rally from here on out — will emerge from areas outside retailing and consumer staples, as these pockets continue to remain expensive in terms of valuations. Edited excerpts:

Are markets — global and domestic — yet again in a March 2022-like situation where they see a sharp correction and give investors a one-time opportunity to buy for the long term?

By and large, the Indian equity market is in a better position than it was in March 2022. Valuations are much more reasonable now and supported by robust domestic macros in the form of a lower current account deficit. Much of the rate-hiking cycle, too, is behind us, even though market levels are where they were 18 months ago.

How long do you expect markets to remain range-bound?

While global uncertainty prevails, on the domestic front, India is relatively well-placed. This is attributable to strong corporate and bank balance sheets, the central government’s focus on building long-term infrastructure that is likely to have a multiplier effect, and policies to help invigorate India’s manufacturing dream.

These measures bode well for domestic markets. Hence, we are of the view that markets are in better shape for the long term. Investors should consider 2023 the year to invest for the long term, without worrying about the near-term outlook.

Which sectors are you bullish on?

We believe leadership — in case markets rally from here on out — will emerge from areas outside retailing and consumer staples, as these pockets continue to remain expensive in terms of valuations.

In most other areas, valuations have corrected meaningfully. Except for select pockets in mid- and small-caps, this space, too, appears reasonably valued.

What’s your view on investment in the debt segment after the recent developments? Which type of debt funds do you see investors latching on to?

Debt as an asset class has a prominent role to play in every portfolio. Investors can opt for short-duration schemes and dynamic-duration schemes.

We are structurally big believers in debt allocation. Consequently, investors can consider investing in categories like equity savings, multi-asset allocation funds, aggressive hybrid funds, and balanced advantage funds as a way of investing partially in debt.

What is the road ahead for flows into equity markets?

Foreign institutional investor (FII) inflows will pick up meaningfully when the US Federal Reserve shifts towards a pause on rate hikes and takes a more dovish tilt. Furthermore, if the economy does well, there is no reason why FIIs will not invest in a delivering economy like India.

In the last financial year, while FIIs sold out of Indian markets, domestic institutional investors went on a buying spree, thereby offsetting most of the selling pressure.

In terms of domestic flows, the systematic investment plan book has held steady above Rs 13,000 crore, in the face of market volatility — a trend we believe is likely to persist.

Is the rise in Covid cases a non-event for markets?

If the number of cases was to rise and consequently physical movement restricted, it would influence economic activity. Consequently, markets, too, would feel the impact. If the caseload is controllable, hospitalisation low, mortality minimal, and the health care system is not overwhelmed, markets may consider it a non-event.

What’s your view on corporate earnings growth?

We believe that corporate earnings growth will be robust and will not be a source of worry in the foreseeable future. The worst of the margin pressures are behind us as input price pressures are abating.

The earnings growth for FY24 is likely to be about 15 per cent. We are particularly upbeat about banks, especially corporate banks. The existing books have been stress-tested incrementally. Asset quality and credit costs of corporate banks will be more benign than they were these past few years. The sector will also be a beneficiary of a revival in manufacturing and manufactured goods exports.

How should investors approach the consumption space — fast-moving consumer goods, consumer durables, etc — amid inflation fears and the probability of an El Niño weather pattern?

We will have to wait for El Niño and accordingly assess its accompanying risks. Moreover, the margins of companies in these sectors were unsustainably high and are likely to disappoint. Hence, we have avoided investing in these pockets, El Niño or otherwise. We expect domestic cyclicals to deliver on volume performance.