‘Today we like smallcaps much more than others’: Sankaran Naren, CIO, ICICI Pru AMC

Smallcaps remains high risk. But, if we take a 4-5 year view, smallcaps are in a place where they look interesting from an investment point of view, Naren tells RupeeIQ in an interview

Kumar Shankar Roy Jan 14, 2020

Sankar Naren, ICICI Pru AMCIndian markets are ruling at all-time highs, but strangely it doesn’t at all feel like a bull market. A polarised rally has meant that only a handful stocks have been going up, and the rest languishing. But, can beaten-down stocks rise like a phoenix from the proverbial ashes? If the stocks are smallcaps, there is a good chance they will. That’s what Sankaran Naren, who as chief investment officer managing Rs 3.4 lakh crore at ICICI Prudential AMC, is arguing these days. Sharing his insights on markets for 2020 at a media roundtable held in Mumbai, Naren tells RupeeIQ’s Kumar Shankar Roy how equities are still not a dirt-cheap asset class, why middle of the road products like balanced advantage funds make eminent good sense and so on. Read on to know more.

Markets are at an all-time high. How are balanced advantage products doing?

Balanced advantage funds endeavour to capture the upside and limit the downside. So when equity valuations go up, equity exposure is reduced and when equity valuations come down, equity exposure is increased. Hence, Balanced Advantage products were able to capture the upside of market.

Smallcaps have really seen the extremes of situations, haven’t they in the last 2 years? How do you view this?

Yes, smallcaps have seen interesting times. In 2018 January, our PMS division returned smallcap money. But, two years from 2018, we are in a situation where we think small-caps are better placed than large-caps. The extent of under-performance has been high. In past two years, smallcaps have underperformed largecaps by almost 50%. After this kind of a performance, today we really like smallcaps much more than any other area.

Does this call on smallcaps mean they are low on risk?

No. Smallcaps remains high risk. But, if we take a 4-5 year view, smallcaps are in a place where they look interesting from an investment point of view.

Many stocks recovered in October-December period. Some of the PSU stocks did not recover. Why did they not participate?

Some of PSU stocks did not recover because there is always an overhang that some more divestment might happen in January-March quarter. Fundamentally, PSUs should have also recovered. If the risk of divestment in Jan-March quarter goes away, there will be a very interesting situation in the entire ‘value stocks’ segment.

How do we start in 2020 as far as equities outlook is concerned?

We start the year in the middle. We again go back to recommending asset allocation. People may find that repetitive, but the reality is that we are still in such an environment. We are still not in a situation where equities are a dirt-cheap asset class otherwise, we would have given an aggressive buy call on equities. Currently, our equity valuation model does not suggest that one can be substantially overweight equities.

Right now in the Sensex/Nifty, only a handful of 10 stocks are going up. Will this continue in 2020?

There is too much of polarisation which is also the reason why many are talking negatively about active fund management. I don’t think one is going to see this situation continue permanently i.e. 10 stocks will only deliver returns. In 2007, people felt only roads will get constructed and cars won’t get sold. In 2017-18, people started saying only cars will get sold, roads won’t get constructed. People, who feel that only 10 stocks are required and other stocks don’t matter, forget that such situations don’t last. Eventually, midcaps and smallcaps will do well and this type of polarisation won’t continue. Over the next three to five years, this polarisation will go away. We can’t predict exactly when this polarisation will go away.

You say that when credit growth is very low, one should put money in risky assets. What is the rationale?

We are at a very low credit growth today. When we are in such a situation, some risky asset must be identified to invest in. When credit growth is very high like in 2007, if you took out money from equity at that point in time then you made money. In 2007, if you had taken out money from infra funds, it was the best decision. Today, despite credit growth at its bottom where valuations are not cheap are megacaps. Despite credit growth at bottom, smallcap valuations have corrected and that is why it is easier to give that smallcap call.

There has been a lot of hope surrounding earnings coming in. But they didn’t. What happens now?

That expected earnings growth has never come in the last 6-7 years. That is a positive if you ask me. Because earnings growth comes in a big way and credit growth comes in a big way, then we would be in a 2007 type situation. But right now, neither has earnings growth come nor credit growth. That is why we are in the middle. That is why our recommendations are for the middle of the road products. For us to give a bigger call on equity, we need to have a much more enabling environment where, for instance, people are no longer bothered about risk. SIP and asset allocation are two ways of investing for the next 10-15 years.

Which spaces in the stock market are at their peaks?

I have already talked about megacaps. Quality is also at peak. Megacaps and quality are two (segments) that are at peaks at this point in time.

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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