Shares of some lenders, telecom firms and utilities are among the top picks for the second-largest asset manager India as it bets on the economy to emerge gradually from the worst Covid 19 outbreak in the world.
With India sticking to nationally severe curbs instead of a nationwide lockdown amid the even smaller coronavirus wave in recent year, the impact on economic activity and businesses has been much lower, according to Sankaran Naren, chief investment officer at ICICI Prudential Asset Management Co. The firm oversaw about 4.1 trillion rupees in equity.
India has yet to see a cyclical economic recovery and the business cycle is not as developed as we would expect, Naren wrote in an email interview. Contrary to the current economy during which sectors like consumer staples and high-quality names gain, the deflationary environment is best placed for cyclicals to do well.
Stocks in India have climbed to record levels even as it fought the worst of the health crisis, as investors continued to pick up shares on optimism over the economy's long-term growth potential and central bank stimulus. The Reserve Bank of India has expanded its version of quantitative easing this month and said it expects gross domestic product to grow 9.5% in the current fiscal year.
Meanwhile, infectious rates in India are falling. The first test cases at the New daily up edifice on Tuesday fell below 100,000 for the first time in two months, down from a peak of more than 400,000 in May.
The Indian business cycle is attractive given that corporates have deleveraged, credit growth is very low, the capex cycle is yet to revive and profit-to GDP ratio is low too, said Naren. On the other hand, the United States is aggressive in the ratio of interest to economic GDP and the country has been pursuing extremely high fiscal and monetary policy.
Focusing on cyclical stocks and value stocks has already proven results for the money manager. The ICICI Prudential Opportunities Fund directly compiled by Naren returns 36% year-to-date and beats 96% of its peers, according to the Bloomberg show. At the end of April, telecom operator NTPC Ltd. and power generation firm Bharti Airtel Ltd. and Axis Bank Ltd. were three of the fund's top five stocks, the data shows.
While the immediate focus for investors is the pace of India's vaccine rollouts and its recovery from the pandemic, Naren said that one of the biggest risks to global stocks could come if local central banks take steps to taper their buying program significantly.
At that point, we expect a meaningful correction of asset prices and economics, he said. One needs to be cognizant of the fact that Indian equity valuation is no longer like what it was in March 2020.
The combined value of all shares traded in India recently jumped for the first time above $3 trillion, nelinquing its status as the world's eighth stock market. The benchmark index S&P BSE Sensex is trading about 22 times its 12-month expected earnings estimates versus a 5-year average multiple of 18.5 times, data compiled by Bloomberg show.
ICICI Prudential Asset Management is preparing to launch a 'flexicap' fund by the end of this month that will give it the freedom to deploy money between large, medium and small businesses in the initial year when the market is likely to be volatile.
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