'US equity market is currently overvalued,' says Mrinal Singh of ICICI Pru AMC5 min read . Updated: 16 Oct 2020, 09:53 AM IST
- US equity market has seen a continuous rally from 2012 to 2020
- Those looking to take international exposure can consider investing across global markets and not just the US markets
Investors are divided over the performance of value-oriented mutual funds and value stocks amid low growth scenario created by covid pandemic. Some believe there is little hope for value names to outperform and thus, value is good as dead and other set believes that post US Presidential elections, value stocks are poised to crush growth stocks. Mrinal Singh, Deputy CIO - Equities, ICICI Prudential AMC believes, "value and growth are two different investment strategies but they complement each other. Both of these styles have their own set of strengths and weaknesses." Mrinal Singh also shares his favorable sectors for investors to go for in the current scenario. He wrapped up the interview with his views on international equities.
ICICI Prudential manages India’s largest value fund, ICICI Prudential Value Discovery Fund with assets under management of nearly ₹16,000 crore. One set of market commentators build assumptions that in a low growth world, there lies little hope for value names to outperform and thus, value is good as dead. What is your take on this?
While value and growth are two different investment strategies but they complement each other. Both of these styles have their own set of strengths and weaknesses. Typically, from a market bottom, value tends to perform well; followed by growth outperformance. From a long term perspective, both the strategies tend to perform well as can be seen from historical data. While value may have phases of underperformance, it would be incorrect to make assumptions that write off this strategy. Historically, value has been one of the most rewarding investing styles for making extraordinary returns over extended period of time. For example in our case, ICICI Prudential Value Discovery Fund has posted 18.16% CAGR since its inception in 2004.
Other set of commentators suggest that post US Presidential elections, value stocks are poised to crush growth stocks and invariably value fund investors will have a joy ride with their investments. How do you see this play out?
Historical evidence clearly suggests that portfolio modelling done on the basis of an electoral outcome hasn't paid off investors. Value portfolios when being constructed do not take into account transient developments such as election as they have limited impact on the nature of returns over long term. What we do consider is the price, profit generating potential, cash flows, management quality and the margin of safety it offers to an investor. These are the traits required for a good business. And if investors are ready to be patient then we believe it will offer a much rewarding experience.
What kind of performance can we expect from value funds? Do you see the consumption boost in terms of announcements made by the Finance Minister further helping value stocks to outperform?
Given the current pandemic situation, we have a lot of moving parts. Longer the prevailing situation continues, higher will be the impact on businesses, particularly the ones which are leveraged. However, there will be a set of businesses, even though weighed down by current constraints, will emerge stronger. This is where we would like to be positioned.
Going ahead, if income growth makes a comeback or GDP growth improves, then there is a case for consumption emerging as a larger theme. But what would be far more important is investment for which the key driver could be Government or private sector. From the current economic phase, investment could be a key lever in post pandemic resolution.
Moving to another category, there are some select focussed funds which have done much better than most other funds in the category. Why is there such a diversion in investor returns within the category? Who should invest in focused funds? What should be the return expectation? Do focused funds suffer from the cap on the maximum number of stocks? Or, is it an advantage?
Return diversion is a phenomena visible across equity fund categories. In case of focused category, this diversion could be higher in the short run, because of the higher concentration bets taken, which is also a category feature. An investor when considering focused category should understand that investments here require longer commitment and higher appetite for near term volatility when compared to other diversified categories. It is important to gauge what is the right strategy which fulfills an investor’s financial goals. This is because there will be phases of outperformance or under performance based on the investment bets taken.
Just like every other category, focused has its advantages and disadvantages. Here, it is very clear that the portfolio will consist only of maximum 30 names, which we believe is a reasonable number. So, this category is best suited for an investor looking at concentrated strategies.
Your NFO on ESG collected more than Rs. 1,400 crore. How different is this fund from the other funds that you manage?
As a mutual fund, we have just embarked on an ESG journey and we are quite upbeat on its future prospects. We believe in the future ESG will be engrained across mandates and will not be relegated to one fund alone as awareness, acceptance and demand for this strategy increases. The data too is supportive with the ESG index outperforming the broader market at large.
We are happy that we were able to on board a large set of investors who are keen to participate in the market in the ESG way. We look forward to doing justice to them. In general, ESG is a very different product with a defined strategy and a set of stocks that we will like to be in. Incrementally this space and evaluation criteria will evolve.
Which are the most favored sectors at this time?
From a domestic economic viewpoint, we are positive on investment oriented sectors. While infrastructure and rural themes have the potentially to deliver returns, we believe there is a sizeable runway of business prospects for healthcare, technology and telecom.
International equities, pharmaceuticals and IT companies have done quite well making a lot of money for investors who could time the entry and exit right on the past few months. Do you favor any of these sectors and why? Can investors expect them to continue their current performance?
We are positive on pharma and software companies. Pharma as a sector may do well due to its critical nature post COVID-19, high earnings visibility coupled with its defensive nature in times of volatility. When it comes to software, valuations are largely comfortable. Given its strong balance sheet, sizeable cash reserves to survive disruption, global presence, better diversification, continued deal wins and good earnings visibility are all factors which are favourable for this sector.
When it comes to international equities, US equity market has seen a continuous rally from 2012 to 2020 and is currently overvalued when compared to any other global market. So we have been very cautious on the US equities. Those looking to take international exposure can consider investing across global markets and not just the US markets.