2019 Jan much better for stock-pickers than last year: S Naren

2019 is going to be a volatile year. That is the reason we have been recommending, calling it the SIP year, S Naren, CIO, ICICI Prudential AMC, tells ET Now.Edited excerpts: Will 2019 be a good year for investors or would it be a year where markets will get earnings projections wrong, politics will have a larger role and the market mood will very choppy and unpredictable? When you compare 2018 January with 2019 January, our view is that 2019 January shows a greater safety margin than in the same period 2018. In 2018 January, most of the market looked fully valued and most of the smallcaps and midcaps looked over-valued. Starting 2019, you find that 80% of the stocks are fairly valued and a small set of stocks could be considered overvalued. So from a mutual fund point of view, which is long-term investor point of view, 2019 January is much better time than 2018 January. Having said that, basically what happens is an election year coupled with US Fed’s last few tightening makes for a volatile year and therefore again from the point view of mutual fund, it becomes very easy to look at 2019 as a SIP or STP year. It is very different from 2018. In 2018, we believed that as you went down the market cap curve, there were more risks and now actually there are much more stock picking potentials and you have a much better environment for stock pickers now although it was believed last year was the best year for stock picking. But frankly, except the four or five mega caps, everything else actually went down through the year. 67333477 So 2019 is a more interesting year for all of us. It is equally likely to be volatile but I would call it a year to put money and accumulate money in equities at this point time. So that is why I like 2019 over 2018 clearly as we speak. All through 2018, the call was stick with largecaps or at best diversify into multicaps. Is the risk reward ratio in favour of midcaps a little bit more now? I believe you are safer in stock picking now rather than going by capitalisation weightage because if you look at largecaps, there are clearly 10 stocks which look overvalued at this point of time. On the other hand similarly in mid and smallcaps also, there are stocks which look overvalued. Having said that, today there are a number of smallcaps that have corrected 30-40%, midcaps that have corrected 20% or so. I would say 2019 is stock picking time rather than deciding which caps to go and where we have changed. Look at where we were and consider the calls that we got wrong. We did not recognise that oil could come down from $85 to $53 and that actually completely changed the outlook towards sectors like infrastructure or banking which clearly benefit with lower interest rates. Banks get some treasury profits as well. Sectors like banking and infrastructure have seen reasonably positive change through the year particularly with the fall in oil. Do you think that 2019 would spell great news for the financial sector and is there an opportunity to generate alpha for the beaten down names? Clearly, banks are in the best situation they have been in the last five-six years. Their cost of borrowing is not going up. Their lending rates are going up. The NPL cycle in corporate India is about to get over and lot of provisioning has been built for that NPL cycle. So, banks are in extremely good phase compared after 2015. From a fundamental point of view, we are in the best phase for banks and that need not be true for all other parts of the financial services industry but banks are the biggest. They have contributed to lower earnings growth in the last six to seven years and they are going to give a cyclical benefit over the next two years in earnings which should help overall earnings of largecaps pretty significantly in the next two years. I would be much more positive on corporate focussed banks rather than the retail banks because the retail banks have had a good run over the last six to seven years. How long can we ignore the selling in US markets? Is it the biggest risk for 2019 that the correction in US market has started largely due to economic reasons and if the correction multiples, we could be looking at serious downside somewhere in 2019? People make use of valuations as a way of saying that the US market is extremely overvalued. When I look at valuations of let us say some of the consumer names, they do not look very high. Clearly, the US market required a correction but I am not so worried about US markets. The US economy is possibly one of the best economies at this point of time and I do not see the risk of a big fall in US. The conditions that existed in 2007 in the form of extra leverage with people and various other problems in the financial system, I do not see that kind of a situation at this point of time. I got a chance to meet with some good global economists and they say barring corporates to some extent, I do not think there is any evidence of extremely high leverage. I am basically not worried about big fall in the markets. But that does not mean that markets are headed one way upward because there is no fear still in India or many of the markets. Second, look at the EMs. There was a cycle from 2009 to 2018, which I would call the US cycle and I would even call it the US tech cycle because you can look at companies like GE over the last 10 years and say that nothing has happened in US. In 10 years, GE has gone down so significantly and I would say that it is the US tech cycle which looks more advanced. Emerging markets have not had a bull run for a long period of time. I am sure that in the last 10 years, particularly on a dollar basis, emerging markets have shown a significant underperformance. I am not in that extremely worried camp. The challenge at this point of time is how much positive returns can you make rather than expecting negative returns or minus 20 or something like that. In a country like India, corporate papers give you 8-9-10% on a three-year basis and so the benchmark return that you have to get on corporate papers for equity to deliver is a challenge we are facing. This is one of the reasons what we have been always doing is marketing debt funds through the year and contrary to what people think, 2018 was a year that most debt funds did well and even today, corporate papers are giving you good interest rates. So I would say the challenge is how much does equity outperformed debt and that is the challenge rather than worrying too much about equities per se. Considering that bond yields are sub-7.5%, what kind of return can we expect from debt funds? Corporate spreads in the post September period have gone up substantially. For example, you have a situation where 10-year G-Sec yields have gone down and many of the corporate papers on the three-year side has actually been giving good spreads. People are looking at 10-year yields and saying interest rates are down. I can assure you most of the corporates are actually borrowing at higher rates except may be a few AAA names. Most of them are borrowing at higher rates than what they were borrowing six months back and that is why I would say debt is remaining an interesting asset class at this point of time particularly shorter duration debt on the corporate side is turning out to be a reasonable interesting asset class. How much global pressures can the Indian market withstand in 2019? 2019 is going to be a volatile year. That is the reason we have been recommending, calling it the SIP year. I do not think volatility is going to be any lower in 2019 relative to 2018. But the way, we always look at whether oil is going down along with the markets or if it is going up when the markets are going down. India is very vulnerable even today to oil going up and markets going down together like it happened in October-December when markets and oil fell together. I think India will always remain outperforming market because one dollar drop in oil improves India’s current account deficit by $1.5 billion or so. It becomes a powerful positive for India. I would say that more than global markets, I will watch oil and I would be worried if oil started to go back to $75-80. If there is global volatility, do I worry so much? No I do not worry about it. Having said that, do we expect 2019 to be volatile? The answer is yes. Do we have appropriate strategies within our mutual fund to help make money in volatility, the answer is yes both through products like SIP, STP and balanced advantage as a category, equity savings as a category, etc. I would say that we are not really worried about global volatility. Clearly elections are important. US is important and as I keep telling people there is no point in asking fund managers on elections, they know nothing. That is the way I look at it and but I would say 2019 is a much more interesting year to invest in rather than 2018 and that is the challenge I have in explaining because in 2018 while everything was looking better, the valuations of many of the small and midcaps were also much-much higher than where they are today. Every year we start with the assumption that cyclicals will make a comeback, but by the end of the year we find, it is consumer where the buying power is. We saw that in 2016-17 and 2018. Would 2019 be any different? It better be because for three years we have lost in consumer stocks on a relative basis because along with earnings going up, price to earnings have also been going up. The price to earnings of most consumer names today are much higher than what they were three years back. We are all trained to think that when you do not have a big capex in a sector, finally at the end of that period, earnings will catch up. If you look at metal stocks, from the bottoms of 2015 they have had a meaningful rally, although 2018 was not a good year. But the 2105-2018 period has been pretty good for metal stocks and I see something similar happening on the cyclical side because if in 10 years, virtually no one has started putting up a power plant, eventually demand for power will catch up and that is why I am really not worried about a cyclical recovery. As long as I am a mutual fund investor, I want to invest for the long term, the longer it takes time for something to play out, the more opportunity I have to get new investors in. So, that is a positive I get from this whole process and that is why for me it is reasonable. If I am a trader and I have kept trading these cyclicals, it could have been a problem but I do not see any big worry on the long term at this point of time. However, consumer names have baffled us. We have gone wrong frankly and I would say we always look for other cheaper alternatives and barring 2008 and earlier years, we did manage to find stocks which outperformed them. But 2018 was a year where it did not work. And having said that, I believe 2019 is a year where again our stock picking models would certainly work. Let us talk about your NFO. It is an NFO which comes under the category of special situation, in an open ended scheme where you are trying to raise money and when your stocks will be declared on a monthly basis. Will this kind of an approach work and what is the differentiated proposition for this NFO?If you look at the global mutual fund industry, many of them have very large special situation funds and there are fund managers like Anthony Bolton who have actually built their entire fame on the basis of special situations. I believe that Indian markets have moved to a model where special situation investing is likely to work. It requires a large active fund management industry because it is a large active fund management industry which is likely to provide stocks to the special situation fund when a problem happens. If there is a problem in quality of any product due to which all the active funds start selling, that share it is actually the buyer of that share who will be able to get it cheap. Special situation investing have good scope in the long run clearly because it is one of the techniques to buy cheap and if you manage to buy cheap you have got one part of the investment argument correct. You have quality control, strikes, trade wars, government policy and other kinds of sanctions. I believe that continuously we are going to be in this phase. We are through with the quantitative easing part of the monetary policy in many parts of the world. I think we are in a phase where we should be able to identify special situations and that special situation investing allows to buy cheap and I felt if there is such a big global category which has done well in many parts of the world, I do not see why it should not do well in India and that is how we looked at it. I think that we would be able to buy cheap, it is part of our natural style of investing which is to look for problems and I believe here you can create a portfolio which is only based on buying into special situations. And the important thing which people have to recognise is it is not necessary that you have to buy the sector in trouble, you could buy an unintended beneficiary. So if you look when the bank NPL cycle happened many years ago the biggest gainers were actually NBFCs and the retail banks. So out of that special situation it was not the one with the trouble you buy, you sometimes buy unintended beneficiaries and there also it gives you a lot of investment opportunity. I think what is the challenge here, the challenge is investors have to have a three to five-year outlook, if people have three-month outlook and look at this kind of a strategy I do not think it is likely to work but a three to five-year kind of a strategy is certainly one of the strategies which can deliver longer-term good returns. Special situations are periodic stresses in say telecom or the selloff in NBFCs or the over-valuation in some of the consumer names. Do you think a special situation fund is not like an SIP product? It is something where you need to invest in bulk because a disciplined approach may not work here? If you look at the last 10 years, there has been wide divergences between the way some sectors like consumer or some of the retail banks have done and how the rest of the market has performed. Special situation investing requires wider divergence of valuations due to problems that have happened in specific sectors. That is one of the reasons to look at 10-year returns of many of the names. You will see wide divergences between one set of names and the other set of names and that is the reason it looks interesting from a lump sum point of view also. But we always believe a category like special situation does lend itself to systematic investment through SIP, STP as well. Today it lends itself to interesting opportunities primarily because the last 10 years have not been normal. We had one of the most hated bull markets and in that hated bull market, there are names like consumers, retail banks and a few others which have done exceptionally well and the rest have done badly because of their own problems. From a starting point of view, we seem to be in an interesting position. Having said that, clearly the challenge for category like special situation and is that people have to have a three-to-five year orientation and not a three-month orientation. That is the challenge we have in communication and that is how we hope investors today are matured enough to look for such high active share, products with a three to five year view.

from Economic Times http://bit.ly/2CJ6uOk