Market Outlook

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Sankaran Naren, ED and CIO, ICICI Prudential Mutual Fund

After a brief spell of volatility, the Indian markets have resumed its up trending journey with the benchmark indices Sensex rallying 14.5% and the Nifty delivering 12% on a one-year basis (as on April 16). Given the rally, Indian equities are no longer cheap (fully valued), but there are interesting/selective investment opportunities in mid and small caps. CY19 is about being stock specific in one’s approach rather than having market cap orientation.

The key difference between where markets were 18 months ago and today is that US Federal Reserve (US Fed) is no longer talking about increasing rates while the European Central Bank withdrew its bond-buying programme and hinted at interest rate hikes. This is a positive development for emerging markets (EMs), including India, as it means that flows from global markets to India can increase, unlike the environment in 2018.

The early signs of this are visible in the foreign institutional investors (FII) inflow data, which on a year-to-date basis has registered an inflow of Rs. 62,240.23 crores (as on April 16) into Indian equities. As a result, even though the markets are fully valued there may not be much correction in the market. There could be volatility in the short-term given the general election related developments.

Amidst all these there are some risks too which one has to be mindful of. Currently, the spike in oil price (currently approaching $70 a barrel), monsoon and how the market is likely to interpret election outcomes, are some of the developments to keep a watch on. The other point of concern is the lack of investor appetite in fixed income instruments investing into corporate debt. At a time when corporate bond yields are attractive, we would like to see much more inflows into this segment.

Earnings

We are positive on the earning season, particularly in the financial space, a pocket which we believe is likely to deliver an encouraging set of numbers given the low base, non-performing loan cycle being provided for and pick-up in credit cycle. We expect some of the consumption-oriented sectors to see a slowdown, but given the size of the profit from the financials, the overall earnings are likely to be healthy.

Our belief is that consumption sector could see a slowdown in the near term. We at ICICI Prudential AMC believe that the best long-term structural idea for facing near-term headwinds is the consumption theme. Based on this thought, we have launched ICICI Prudential Bharat Consumption Fund, an open-ended equity scheme following the consumption theme.

Sector Picks

We have been positive on several sectors that have not done well, such as public sector units (PSUs), metals and corporate financials. We are of the view that the nonperforming loan (NPL) cycle has almost come to an end, which is a notable positive for corporate financials. Barring a few quality stocks and mega-caps, we believe the market is not overvalued.

Currently, PSUs, metals and telecom are the contra bets in our portfolio. Even though many of the public sector banks and metal stocks have been part of the recent up move, we are of the view that these names are not ahead of their fundamentals, as they have been underperformed since a long time.

Investment Advice
Equity

We would like to remain nimble footed as valuations are no longer cheap. For lump sum, we recommend balanced advantage/dynamic asset allocation schemes or conservative hybrid fund. Equity accumulation, in mid and small caps, should be in a staggered manner via SIP/STP. The large disconnect between price and value in many ‘growth’ and ‘value’ stocks has corrected. However, the valuation divergence still persists. Therefore, we expect value and special situation themes to play out in 2019.

Debt         

In the fixed income space, we are positive towards the short end of the yield curve. We continue to believe that the risk-reward benefit is still favourable in the one to three year segment of the yield curve. However, we aim to capitalize on any opportunity that is presented to us and therefore, we have added up onto longer assets in the State Development Loans (SDL) and corporate bonds which were available at good spread. As a result the duration in our select portfolios have increased considerably. This strategy is a play on spread compression in the SDL and Corporate bond space.

As per our investment framework, accrual schemes have moved into ‘buy’ territory with attractive valuations (spread between repo rate), reduced flows, and negative sentiments (NBFC liquidity crunch). The risk-reward benefit has turned favourable and it’s a good time to earn the carry with high credit spreads available in the corporate bond space. Having said that, we remain cognizant of managing the liquidity, concentration, credit and duration in our accrual portfolios to provide better risk-adjusted returns.

We recommend short duration schemes, which could mitigate interest rate volatility, accrual schemes, which provide better carry, and dynamic duration schemes, which are flexible enough to benefit out of interest rate volatility.

From the desk of Sankaran Naren, ED and CIO, ICICI Prudential Mutual Fund

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