Big Story | We are in midst of strong earnings catch-up: Sankaran Naren of ICICI Prudential MF

You’re right. We don’t revisit our portfolio choices because of only that. But we took a call, about two years ago, that we will bet on the sectors and stocks that the Street deems as ‘non-quality’.

We have been increasing weights on cyclicals and on the sectors which are underperforming badly.

We have also increased the intensity of those bets over time.

So, we do keep looking for any risks to our investment thesis in these sectors and stocks. We found none in the Budget, and the Budget announcements actually support our bets.

Sectors such as metals, banking, infrastructure, power utilities fit into this description. To put it differently, the position we have taken is anti-consumer staples and has no connection to information technology or pharma. Our portfolio view today is also that debt will underperform equities going ahead.

It is always safer when all the information is disclosed to you upfront. If you look at the actual Budget numbers, have they offered any major income-tax exemptions? The answer is no. Have they reduced corporate taxes? No. Have they reduced excise duty or GST rates? No.

They’ve only increased their fiscal deficit projections for the next fiscal.

To me, that means fewer reasons to worry.

Now, if you look at recent macro data, the day prior to the Budget, we had the highest ever GST collections for January at ₹1.2-lakh crore. The week before the Budget, we had the highest ever power demand in the country. PMI (Purchasing Managers Index) data in recent times has been strong.

With the low base effect, we’re going to see the economy growing at the strongest rate we’ve seen in recent history, in FY22. So, I’m not worried.

Absolutely. The Budget assumptions are also quite conservative. This year, no one is complaining about stretched assumptions on tax revenues, or expenditure. Except for the public sector disinvestment number, there’s no other area where people have said that the Budget assumptions seem unrealistic. To my mind, this means less worry about not meeting Budget projections.

That trigger is coming from the economy. What I’ve been telling people in the last 3-6 months is that in the last 4-5 years, we’ve been in a deflationary economy. A deflationary economy means that output prices go down steadily. When output prices trend down, companies find it difficult to deliver top-line and earnings growth — in fact, they show degrowth.

Now, I believe we’ve moved out of a deflationary scenario into an inflationary one. This means that output prices now have room to improve, which can be supportive of company revenues and earnings. In fact, if you’ve noticed, after the September and December earnings season, very few are complaining about the lack of earnings growth. Earnings are, in fact, beating expectations. To my mind, therefore, the problem about lack of earnings growth for India Inc is fading away.

We think thatone should be very worried about any sector or theme that did too well between 2008 and 2020.

This, in my view, will consist of most consumer-facing stocks including consumer staples, retail NBFCs and very high-quality stocks.

Now, I believe that all other themes outside these should do well, particularly cyclical equities. In debt, I believe the easy gains from owning safe, long-duration securities are over.

Now, it is time to look to accrual debt funds.

I think this is a secular trend and that the bull market will eventually end because of it. Let me be clear — that point may not be anytime soon. I am not talking of three months, six months, a year or even 2021. But at some point, inflation can get out of hand.

Then, central bankers will be forced to increase rates and remove liquidity from the markets in the Western world. This will be the trigger for stock valuations to correct, signalling an end to this bull market.

But let me caution again. It is not possible for equity fund managers to determine when this will happen, as it is in the hands of global central banks. Right now, quality equities are quite expensive. Non-quality stocks and cyclicals will eventually catch up, too. Once that happens, you will find that you will end up in a situation where inflation is back for good, leading to rate increases and eventually, an equity correction. That will lead to rate increases — that will eventually trigger an equity correction.

We are quite clear that one can’t time this call.

This is why we keep emphasising the need for investors need to maintain balanced asset allocation to both equities and debt, based on one’s risk profile and relative valuations of different asset classes.

No. Today, if we look at the Indian situation, most industries have slack capacity in India. Power generators are at 60-65 per cent plant load factor.

Automobile makers have higher spare capacities. Cement makers also have spare capacity. So, as demand picks up, this spare capacity must be used up in full first, before it leads to inflation.

Whether inflation arrives first in India or the rest of the world, it’s hard to say.

To me, the US economic and market cycles look far more advanced than the ones for India. In the US, for the last eight years, they’ve had a bull market and a retail investor frenzy, which you’re seeing evidence of, in episodes like the GameStop saga. You need to remember that the US also has far lower interest rates than India.

So, it is more likely that risks to this rally could emerge out of the US markets. Even if Indian interest rates were to move, it would be not as important for Indian equities, which are driven mainly by foreign portfolio flows.

I would say no. Equity mutual funds in India, which are mainly retail, have been reporting net redemptions in recent months. Yes, there is direct equity-buying by retail investors to compensate. But I don’t see a buying frenzy of the scale like we saw in 2007. In 2007, equity funds received massive net inflows.

As the owner, the first step would be for them to announce substantial stock buybacks and raise their dividend payouts. Many of the PSUs are very strong companies, fundamentally. If you increase shareholder rewards, that in itself will help stock valuations with a lag.

Yes, but that’s exactly how I believe deep value emerges in the stock market. People don’t pay attention to positives for a long time, and that keeps strengthening a case for a stock or sector. A few months ago, markets were not willing to even look at metal stocks or commercial vehicle stocks — but the gains on some of these stocks have been impressive. For 4-5 years, no one would touch real-estate stocks, but now there’s interest emerging in the sector in the last 3-6 months.

Everything is a cycle. A long period of negativity actually creates the right conditions for a sector or stock to outperform.

On debt, I feel it is time to stick to short-duration and look to accrual and credit risk for better returns. The time for duration bets is over.

That’s been true for a while now. Right from October, I have been quite bullish in my media interviews. I think we are in the midst of a strong economic recovery right now, which will support an earnings rebound and strengthen the case for owning equities.

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