The Hindu Business Line : ‘Value stocks may outperform’

On the domestic front, the interest rate cycle seems to be peaking out, the monsoon has been good. These are positives for companies and for the markets.

MR Sankaran Naren, Head, Equities, Prudential ICICI MF

Aarati Krishnan
Shanthi Venkataraman

ICICI Prudential AMC’s Indo Asia Equity Fund, a fund designed to exploit investment opportunities in Asian stocks, is being rolled out amidst a tumultuous phase for stock markets worldwide. Mr Sankaran Naren, Head, Equities, at ICICI Prudential Mutual Fund, takes a few questions on the outlook for the Asian markets and for Indian stocks:

Typically, Indian equity funds that invest overseas focus on emerging markets outside of India. Any particular reason why you are focusing on Asia alone?

We felt that Asia offered the best secular growth potential because of the strong domestic consumption in these economies, driven by rising consumerism. Typically, if you take emerging markets such as Brazil or Russia, they do have a dependence on commodities. In Asia, that is not the case.

The MSCI Asia Index (ex Japan) has outperformed the World Index every one of the past five years. Yet, its PE multiple is at a discount to the MSCI World index. That signals a buying opportunity. The other point is that stocks from other Asian economies offer a good complement to the Indian market. While India is a large services exporter, there are several other Asian companies which are large product exporters.

How exposed are the Asian companies to a US slowdown? Several of the large index constituents in the Asian markets are companies focused on the US markets….

In our view, these economies have a sufficient growth driver in domestic consumption to offset such an impact. If you take our Indo Asia Equity Fund (the fund through which the overseas component will be routed), financials and industrials are the top exposures at present.

These are largely a play on domestic consumerism in these economies. Further, except for India, these economies run a trade surplus. With the credit cycle relaxing, consumption and spending could receive a boost.

Aren’t Asian economies still on a tightening spree? China is still trying to raise rates to cool its economy, Japan continues to hint at further rate hikes….

Not for long. Asian economies have been trying to introduce tightening measures in order to cope either with a rising trade surplus or capital flows. You will find that, if the US economy slows, this will lead to a reduction in the large trade surplus in China and other Asian countries, and tightening measures may no longer be called for.

Similarly, in Japan, rates are at such a low level, a small increase may not have a material impact (on consumption).

Funds such as your ICICI Prudential Discovery Fund that have used value-investing strategies have not delivered over the past couple of years. What is your outlook on “value” versus “growth” stocks?

The Discovery Fund has strictly adhered to its mandate of selecting stocks based on parameters such as PE and dividend yield. If you compare this fund to other value funds in the market, you may find that this fund’s PE is among the lowest within the category.

We continue to find some good investment opportunities for the fund.

If you look at the valuation multiples of select FMCGs or healthcare stocks, they are well below their historical average.

They are really inexpensive when compared to the past. We believe that, in an environment where capital becomes more expensive, stocks and sectors such as these, which do not require a steady infusion of capital, could outperform. Usually the themes and sectors that outperform follow certain cycles. We believe that themes such as FMCG, healthcare — “value” as a whole — have under-performed over the past three years. They may now begin to outperform.

On the other hand, stocks in “growth” sectors such as capital goods, that are capital-intensive, are not cheap. Their PE multiples are already at a significant premium to the markets.

Therefore, the growth potential over the next two years is already in the price.

What is your outlook on Indian stocks at this juncture?

We believe that the Indian companies (except for technology) are not very vulnerable to a global liquidity crunch or US related slowdown.

However, while our economy is not very vulnerable to a global credit crunch, our capital markets certainly are.

The economy could be indirectly impacted if capital flows are impacted; but the impact is not a direct one.

On the domestic front, the interest rate cycle seems to be peaking out, the monsoon has been good. These are positives for companies and for the markets.

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