S Naren Says Valuation No Longer The Problem For India Stocks
The ED and CIO of ICICI Prudential AMC said Indian markets will benefit only if U.S. markets fall and if the Fed stops tightening.
A couple of months back investors had a tough time deciding whether to invest in Indian stocks trading at rich valuations. That problem no longer exists, according to India's largest asset manager.
"Today the problem is outlook, not valuations," said S Naren, executive director, and chief investment officer at ICICI Prudential Asset Management Company Ltd., which oversees about $42 billion.
Indian stocks have been Asia’s top performers until recently as investors flocked to the nation’s securities, attracted by the fastest growth among major economies. However, surging oil prices, a plunging rupee and growing financial concerns about non-bank lenders have soured sentiment in the last couple of months.
According to Naren, India requires a meaningful correction in U.S. stocks, which would trigger an emerging market rally. Without a turn of sentiment in the U.S., he said, a bulk of the money would go there. “A lot of money has found its way to the U.S. and … market participants there must believe the Fed is done with rate hikes.”
The silver lining, according to Naren, is that volatility is a better time for investing. “We’re not in 2008,” he told BloombergQuint in an interaction, referring to the global economic crisis. “We won’t have a big vertical fall, but markets can remain undervalued for some time. Hence, this isn’t when you can be massively overweight on equities.”
Naren said small caps offer better reward among equities, albeit at higher risks and with no clear recovery timelines. However, the risks are lower than what they were a year ago. Moreover, barring a few stocks, the valuations too look a lot more reasonable.
Naren said the consumption sector will experience a slowdown in the near term as India’s trade deficit rises. “When you (India) have a trade deficit of $15 billion per month, you must reduce your imports, which means you end up slowing consumption.” The ICICI Prudential AMC, he said, is focusing on sectors that cater to import substitution and exports.
This would likely benefit the manufacturing and financial sectors. India can’t have such a high trade deficit and the slowdown will happen—either due to a sovereign decision or consumption reducing because of higher costs, he said. “Corporate-focused banks will do better because we have had a period where retail lending has done well.”
The non-banking financial sector, according to Naren, has a huge scope to correct. “Some of the NBFCs have grown over 30 percent for the last 5-6 years and for them to raise resources to continue growing at 30-40 percent will be a challenge,” he said. That's not all. “Unless the U.S. starts easing, which could happen only over the next three years, the constraints on local liquidity could last.”
Naren said that a major correction in the rupee has taken place, which will see an uptick only “if we’re able to see a slowdown in imports and if oil keeps correcting”. Despite being positive on the IT and pharmaceutical sectors, he said valuation concerns persist due to which it’s difficult to see a huge upside in these sectors.
However, he was contrarian in his views on public-sector undertakings, as many such organisations have come down to “good valuations and deserve a look at”.
The telecom and metals sectors and corporate-facing banks with decent deposit franchises, according to him, were good bets. “There has been no new capacity for metals and they serve as great import substitutes. The sector benefits from the dollar-rupee move.”