'Internet, healthcare and life insurance are a few sectors which offer solid long-term decadal potential.'
With the markets ruling at all-time highs, Manish Kumar, bottom, chief investment officer, ICICI Prudential Life Insurance that crossed Rs 2 trillion in assets under management in the 20th year, tells Puneet Wadhwa that "as long as liquidity remains ample, economic recovery gathers steam and the Covid vaccine roll-out picks up pace, markets will keep climbing the wall of worry."
How do you see the markets play out in 2021?
Structurally, India is seeing a broad-based recovery with less sectors going through stress despite being hit hard by the pandemic.
Indian markets are yet relatively insulated from global uncertainties.
Over a 12-month view, we believe they will be supported by earnings traction and normalisation of growth with key drivers for India remaining intact.
Having said this, the rally from the March 2020 lows has been steep.
There is always a possibility of markets undergoing consolidation/time-correction and digesting these gains.
As long as liquidity remains ample, economic recovery gathers steam and the Covid vaccine roll-out picks up pace, markets will keep climbing the wall of worry.
Your sector preference at the current market levels?
The recovery since the March lows has seen fairly fast sector rotation and have kept investors on their toes.
We have maintained a calibrated approach towards sector weights.
Our stock picking is focused on certain themes, which includes industry leadership, financialisation of savings, privatisation, exceptional businesses/managements and exporters and import substitution.
Information technology, pharma, specialty chemicals and upcoming electronic manufacturers are key overweight sectors for us.
The underweight sectors are autos, power utilities, oil and gas, and lenders with a poor track record.
A weak business outlook and or disruption threat weigh heavily on our underweight decisions.
Can the financial sector lead the next leg of market rally?
Given that BFSI is the largest segment of the market at around 40 per cent index weight in Nifty, it will play a pivotal role in leading the markets higher.
Also, after a long break, we are seeing interest coming back in cyclical/commodities/PSUs, which are ignored segment of the market.
We think that sector rotation, a trend we saw in 2020, will continue even in 2021, depending on the extent of underlying macro and corporate earnings recovery.
To what extent have the markets priced in India's economic situation?
Markets are taking their cues from global central banks, which have shown an inclination to tolerate slightly higher inflation due to exceptional supply disruptions caused by the pandemic.
Besides, both the Reserve Bank of India and the government have built up their inflation fighting credibility over the last few years which has come to good use now with the market willing to wait for policy makers to sort out inflation concerns before it gets out of hand.
On rising oil prices, there is sufficient excise tax buffer that the government can use to limit pass through.
Fiscal deficit widening is mainly due to revenue decline but prospects have improved due to swifter than expected recovery in activity.
How are you tackling the consumption basket?
The fast moving consumer goods sector could lag the earnings recovery, as it had seen the minimum earnings disruption.
Within consumption, we prefer FMCG (better growth versus pre-Covid, while valuations are either at par/marginal premium to pre-Covid) to discretionary names (most trading at high premium to historical valuations despite baking strong recovery in FY22).
What is your advice to someone who wants to invest for the next decade?
Over a 20-year period, the consumer stocks, autos and private banks, etc have outperformed.
In the last 10-year period, there has been an outperformance in private banks, consumer and IT services.
Consumer, IT, BFSI have been the bedrock of Indian equity markets and benefit from strong underlying catalysts (demographics, digitisation, credit penetration and per-capita consumption).
Apart from these, new-age sectors like the Internet, healthcare and life insurance are a few sectors which offer solid long-term decadal potential, in our view.