ICICI Pru MF valuation model suggests ‘Neutral on equities’; no time yet to take a big buy call

The ICICI Prudential valuation model was reasonably accurate in predicting the 2008 market crash, as it had asked investors to ‘book partial profits’

Kumar Shankar Roy Feb 13, 2020

Equity outlook sectorsWith the ascent of domestic stock benchmark indices seemingly unstoppable, here is some food for thought. At the end of January 2020, premier fund-house ICICI Prudential AMC’s in-house equity valuation model remained in ‘neutral zone’. If one were to allocate money as per this model, then they would neither be a bull nor a bear.

The Jan-2020 end score on the model is 111.05 compared to Dec-2019 score of 112.67. The lower the score, the better it is in terms of investing in stocks. But the marginal change in Dec-2019 and Jan-2020 values does not inspire much confidence in those expecting a big call on equities.

When valuations are in neutral zone, the fund-house reckons it is a good time to remain constructive on equities with a ‘long term perspective’.

The equity valuation index is calculated by assigning equal weights to Price-to-Earnings (PE), Price-to-Book (PB), Govt. Securities PE and Market Cap to GDP ratio. The data is as of January 31, 2020.

ICICI Prudential Valuation Model

It must be mentioned that for a greater part of the last eight to nine months, ICICI Prudential MF’s equity valuation model has stayed in ‘neutral’ territory. However, the Sensex has risen over 11% in last 6 months alone on the back of a narrow rally in select giant cap stocks.

The Indian equity markets had ended January on a negative note in line with global equities owing to growth concerns arising from coronavirus outbreak.

The Union Budget for FY21 presented on February 1, was aimed at reviving growth by attracting foreign flows through equity and debt.

Talking about its February 2020 outlook, ICICI Prudential MF said: “Current market performance is driven by handful of growth stocks. Many value stocks are available at reasonable valuations.”

The ICICI Pru valuation model recognises five actions as per its framework: aggressively invest in equities, invest in equities, neutral, incremental money to debt, book partial profits.

From June-July 2015 to early part of 2016, the equity valuation model indicated ‘invest in equities’.

Around January 2009, the model has indicated ‘aggressively invest in equities’. This was after the model showed ‘book partial profits’ from June-July 2007 to January 2008, before Indian markets crashed in sync with the rest of the globe due to the US subprime mortgage crisis.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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