We continue to believe value investing will prevail, says S Naren

Value funds have staged a strong comeback in the last few months. "Over the past 17 years, value investing has emerged as a good long-term investing strategy, especially through the SIP- route for long-term equity investors," says S Naren of ICICI Prudential Mutual Fund. Edited interviewEveryone is talking about value these days in the market. As a well-known value investor, how do you view the scenario?There is good scope for return to be made from value investing. Even today there are many sectors where valuations are attractive. Many of these pockets have not delivered returns in the period after 2008. When it comes to equity investing, value-oriented approach is something we would actively recommend long-term investors to consider. However, we have to remember that globally due to the central banks pumping in record amount of money there has been a distortion in asset prices. Due to this there are risks to assets' prices which may play out at some point of time in the next four to five years, not just for value, growth or quality investors but for investors in every asset class since the long -term impact of central bank's action is unknown.There is a general view that value investing has changed in the last few years. Do you agree?Value investing is buying a stock below its intrinsic value. But how intrinsic value is calculated in a disruptive world is open to interpretation. A year before several investors believed that metals have limited intrinsic value whereas we believed otherwise. The last one year showed that metal too has intrinsic value. So, as long as you have a fair understanding of what intrinsic value is in the new world, value investing has not changed.Value Discovery Fund also benefited from the rally. The scheme has offered over 70% returns in the last one year. Do you feel vindicated?We have been believers in value investing through the years and launched our value fund in 2004. Over the past 17 years, value investing has emerged as a good long-term investing strategy, especially through the SIP- route for long-term equity investors. At the same time there have been periods such as 2006-2007 and 2017-2018 when investors doubted the idea of value investing.While past returns are no indication of the future possibilities, the Rs 10 NAV of 2004, despite all the volatility in the market has grown to 192.63 as of 31 March 2021; a CAGR of 19.46% against 15.72% posted by Nifty 50 TRI. We continue to believe that value investing will prevail, but risks do exist for both equity investing and for value investing. Nevertheless, we are intrinsic believers in value investing.The current market levels and Covid situation are making existing investors, including seasoned investors, a bit nervous. How do you view the market?The Indian equity market has been under pressure off late with the rampant spread of Coronavirus across the country. Given that this is an evolving situation, the near- term equity market sentiment remains weak. Since we went through a similar situation a year back, we believe both the corporates and investors are better prepared to face the challenges that could possibly come our way.Once the pandemic is brought under control through vaccinations, we expect the recovery to gather momentum. We believe there will be a period of cyclical economic recovery as the accommodative stance of the US Federal Reserve is likely to continue for some time. The real risk to the market, apart from the pandemic induced challenges, will emerge when the US Fed turns hawkish or raises rates or rolls back quantitative easing. Any of these developments has the potential to bring down US and other global markets significantly. So, essentially from here on, we believe that the room for volatility is very high. The only way an investor can address this risk is by adhering to asset allocation discipline.Do you think Indian economic activity can justify the current market?We are not at the peak of the economic cycle when we look at parameters such as credit growth, capacity utilisation and capex cycle. Consequently, we think there is scope for improvement in economic cycle and that would lead to a positive impact on equities.You often call the market right. Do you think investors should get in equity or increase allocation to debt?For investors looking to take exposure to equities can consider investing through the SIP route with a long term (10-year) investment horizon. Those within an investment horizon lesser than 5 years, should consider investing in a scheme which is hybrid in nature such as the asset allocation scheme or the balanced advantage category of schemes. These categories of funds are well placed to take advantage of market volatility and such products have the flexibility to move assets between equity and debt based on their relative attractiveness. Several sectors are doing well. Which are the sectors that are looking promising at the moment? We think most of the cyclical sectors represent good value till the central banks tighten monetary policy. Within defensive sectors, pharma and IT represent relatively better value compared to consumer sectors.What is your advice to new investors getting into the market?Investors should be aware that part of the reason for good returns in equity market is significantly due to the role played by the global central banks in keeping asset prices elevated by pumping in record amount of money. This will be called to question at some point in time over the next three to five years and that would be a source of volatility for asset prices. We have been continuously communicating that global central banks is the main reason why US stock market has been continuously rallying since 2012. With inflation in most commodities rearing its head, it is very likely that going forward global central banks will be responsible for a probable market correction. The room for volatility in equities remains high. The only way an investor can address this risk is by adhering to asset allocation discipline.

from Economic Times https://ift.tt/33ey7Lw