S Naren, ED & CIO, ICICI Prudential AMC says he is positive on debt as it has become an attractive asset class given the higher yields amid rising interest rates. He is also positive on manufacturing, healthcare and financial services when it comes to equities. In a freewheeling interview he shares with Business Today what will define the markets in 2023.
BT: What is your big call on asset classes?
S Naren: Given the widespread belief that investors should only participate in equities, the big call is that investors should also invest in debt. In India, credit has grown by 20 lakh crore over the past year, and the government has a net borrowing programme of 12 lakh crore, of which 6 lakh crore will come from the insurance industry and other sources. The banks must provide the remaining borrowing of almost Rs 6 lakh crore. In the meanwhile, the deposit growth is just Rs 15 lakh crore of the required Rs 26 lakh crore. So, there is essentially a funding shortage in the debt market. In the past, asset classes with low investor interest have performed well in the short to medium term. A similar trend was visible in telecom, metals and PSUs as well three years back. Investors were reluctant to invest in these sectors and those are the very sectors which have delivered robust returns now.
However, given our call on debt, this does not mean that we are negative on equities. What we are saying is that we are positive on debt as it has become an attractive asset class given the higher yields amid rising interest rates. Also, debt is interesting based on the investment theory that one should invest in those asset classes which are facing a lack of investor interest. Here, investors can consider categories like dynamic bond, credit risk, savings, ultra-short for debt allocation requirements.
BT: For 2023, what should be the takeaways for retail investors?
S Naren: Our mantra for 2022 was about practicing asset allocation and being systematic with equity investing. Now, in 2023, we are continuing the same and have added that investors should consider investing in debt mutual fund.
BT: Does this mean tilting asset allocation towards debt?
S Naren: No, we are not asking investors to tilt their portfolios towards debt. Because of the low returns debt funds generated in the past, investors should not ignore the future potential opportunities that exist in debt funds. Over the last two years, retail investors largely opted for equity and hybrid funds. Barring debt index funds, there was hardly any net inflows into debt mutual funds. Apart from this, investors should continue with equity SIPs and stick to investing within the asset allocation framework.
BT: Over last few years, the return from debt mutual funds was around 4 per cent. When you say invest in debt funds, what kind of returns should one expect going forward?
S Naren: There is a better opportunity to generate risk-adjusted returns in debt today compared to the past three years. Before 2020, similar was the case with metals and PSUs on the equity side, with rates poised to rise, the debt outlook is set to improve.
We also have to remember that between 2008 and 2021, we had 13 years of quantitative easing by the global central banks. During this time, corporate India could easily borrow at very low rates (close to zero) globally. Today, that is no longer the case given that banks have moved on to quantitative tightening and rates have risen. This would translate to corporates borrowing more domestically which is another reason debt becomes interesting.
BT: What is your outlook on equity markets?
S Naren: We believe India presents a very good structural story, stable economy, and hence is currently overvalued. Between large cap, mid cap and small cap, we are positive on large cap and flexi cap category at this point in time. Post the sharp selling by FIIs, large caps are better placed on valuation terms than mid and small caps. Given this setup, staggered investing via SIP is likely to aid investors in their wealth creation journey.
BT: From your basket of funds, what funds would you recommend to investors?
S Naren: If one is investing through SIP then they can consider investing in aggressive categories like mid cap, flexi cap, value, special situation or small cap to benefit from the potential volatility in these pockets. On the other hand, if you are considering lump sum investment, then we prefer asset allocation oriented or hybrid category offerings given that equity markets are not cheap. Debt can also be considered for lump sum, particularly the shorter duration and accrual strategy schemes.
BT: Going forward what strategy would you recommend? Will it be momentum or value?
S Naren: It is tough to gauge whether momentum or value will deliver in the year ahead. At this point, we believe investors should focus on asset allocation strategies. Three years back, value was very cheap which is not the case now. We believe that as the US Fed stops hiking rates, precious metals like gold and silver are likely to do well. We were of the view that this call will play out in a protracted manner, but some of the precious metals have already rallied significantly.
BT: What themes are you looking at for 2023? Especially in the light of government’s focus on manufacturing?
S Naren: We are positive on manufacturing, healthcare and financial services. From a 12 to 18-month perspective, we believe systematic investing in export-oriented themes like IT could deliver returns as recession fears would have abated by then.
BT: Post the last Fed rate hike, RBI MPC is due this month. Do you think they will increase the rate or are we near the terminal of peak rates?
S Naren: We expect rate hike by both the RBI and the US Fed in the next round of meetings. But after this, it remains to be seen how fast the central banks will raise rates going forward. In India we believe trade balance is more of a concern than inflation unlike the Western world. We could manage inflation better because India did not engage in excess be it in terms of either printing too much money or reducing interest rates to near zero. However, the slowdown in advanced economies and rise in oil prices is negatively impacting our trade deficits.
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