BackICICI Prudential Life’s Manish Kumar picks four themes for next 10 years
The first theme is BFSI, which, Manish says, will be in a very advantageous position owing to the rise in per capita income and penetration, driven by digital adoption, and with macroeconomic recovery
PremiumNEW DELHI : Manish Kumar, chief investment officer, ICICI Prudential Life Insurance Company Ltd believes that calling small-caps “risky" may not be appropriate. In an interview with Mint, he shared his views on why environmental, social and governance (ESG) funds make sense in a portfolio and the outlook of the realty sector. Edited excerpts:
Can China’s Evergrande crisis be the trigger for a big correction?
There are a few drivers for the market over different horizons. In the short-term, market valuations may be driven by fears—about an impending crisis, Evergrande for instance—liquidity, and short-term earnings. Currently, we have an environment where liquidity is ample, earnings have been supportive, earnings expectations are high due to recovery from covid-19, thus leading to indices trading at P/E multiples that are higher compared with the past. As a result, a correction is expected by some investors, which is very natural. However, given that China has a very tight control over its economy, we believe that the Evergrande crisis may not lead to large-scale financial contagion globally.
Is the realty sector headed for a multi-year bull cycle?
We believe the real estate sector is poised to benefit in the coming years. The supply side has been consistently shrinking for the past few years and now inventory in most markets has come down. Demand in the top seven cities has been stable, with end-users keeping the market buoyant. IT hiring in the past two cycles reflect the increasing primary demand (new homes) with a lag of two-three quarters and the last three quarters has seen strong hiring by IT companies. Valuations aside, almost all large developers now have a good balance sheet and have delivered well in the past. Hence, these developers can ramp up quickly.
Has the small-cap space become risky?
Small-cap stocks have done well over the past one year against large-caps as the NSE Small Cap 100 Index has outperformed the Nifty 50 Index by about 33% over the one-year period ending 31 August. However, if we look at the same over a longer period of 10 years, we find that Nifty has outperformed the NSE Small Cap 100 Index by about 1.5% on an annualized basis. The two have moved together over longer periods with some lead lag. Therefore, to say small-caps have become risky may not be appropriate. There may be a school of thought pointing out that small-cap indices are trading at higher multiples and are expensive and hence riskier. However, we need to be cognizant that it may be simply because of relatively smaller coverage of these stocks as well as lower predictability of earnings in some cases. As a segment of the market, they throw up some good candidates for future winners and one must constantly look at this set to identify the same.
Which theme will dominate the next 10 years?
We believe the following themes will do well in the coming decade: The first is BFSI (banking, financial services and insurance). Rising per capita income and penetration, driven by digital adoption, with macroeconomic recovery/growth will keep BFSI in a very advantageous position. Both lending and savings/insurance shall see strong growth. Second is technology; covid has accelerated the digital transformation journey of global enterprises. Indian IT players will benefit from this multi-year tech spending cycle. The balance sheet and cash flow characteristics of top Indian IT companies are pristine. Digitally enabled businesses are here to stay and shall become a key sector in the coming decade. Next is cement; India’s capex and real estate cycle is resuming after a decade of stop-start stagnation. Cement offers a clean play on the capex theme with strong balance sheets and demonstrated management execution excellence. Last, we believe that consumer remains an evergreen theme. The market share shift from the unorganized to organized sector provides a lucrative long-term opportunity.
There is still no standard definition of what qualifies for ESG. In this context, do ESG funds make sense?
ESG is a very broad term. However, investors are arriving at a broad agreement to identify companies that do better on the ESG front with the help of third-party benchmarking and their own internal frameworks. As a result, we have indices now comprising of these relatively better ESG companies. More and more funds are getting allocated to sustainable investing as a strategy. Data suggests that ESG indices have delivered better returns compared with normal indices globally over the past 10 years. At the end of 2020, $35.3 trillion assets globally followed some kind of sustainable investing criteria as per the Global Sustainable Investment Alliance (GSIA) estimates. This is likely to grow further as the awareness improves and more corporates start giving ESG the due importance. Therefore, we believe that ESG-focused funds will continue to do well over time.
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