Expert view: Dharmesh Kakkad, Senior Fund Manager, ICICI Prudential AMC, said that FII selling has made Indian stock market valuations reasonable, though they are not yet cheap. Amid the current market environment, the fund manager suggested adopting an investing style that focuses on quality stocks as they generally perform well during heightened volatility. Edited excerpts:
How do you assess the current market environment in terms of earnings visibility and valuations?
On the earnings side, we are of the view that the earnings downgrade cycle is likely coming to an end. With meaningful monetary easing from the RBI and fiscal support from the government, the broader macro environment appears supportive for a recovery in growth, which should eventually translate into an earnings revival as well.
From a valuation perspective, the market has already gone through a phase of underperformance driven by high starting valuations and a limited margin of safety. That has played out over the last year, with returns remaining muted. As a result, valuations have become reasonable but not cheap.
Amid ongoing consolidation, how should investors manage return expectations?
Historical experience shows that when valuations are high and the margin of safety is limited, returns tend to be muted. At such times, patience is critical. Investors who remain invested through this phase tend to experience reasonable outcomes over longer periods. So, investors mustn’t anchor their expectations on the past periods of strong market performance.
Amid rising geopolitical risks, what should an ideal investor portfolio look like?
We believe adhering to asset allocation is the optimal approach to tide us over volatile times. Within equity allocation, products with mandates that are flexible to invest across market capitalisations, themes, and sectors can be considered. Given the steep rally in precious metals, any incremental allocation to them can be considered through a multi-asset type of offering over standalone exposure.
Where do you see the best risk-reward opportunities in the Indian equity market over the next 12–24 months?
Given that the markets are not cheap, risk-reward opportunities are being gauged through a relative-value lens. The focus is on sectors where expectations are muted, ownership is low, and valuations offer a reasonable margin of safety.
One of the sectors we are considering is technology. This space stands out due to extreme pessimism, low implied growth assumptions, strong balance sheets, high cash generation, and improving deal momentum. FMCG is another sector which we believe has potential, as there are some signs of recovery in volume growth, valuations are reasonable relative to history, and ownership is also low.
Pharmaceuticals continue to offer a strong growth runway across domestic and export markets, supported by R&D investments, specialty portfolios, and structural growth drivers. Oil & Gas also presents value due to attractive valuations, under-ownership, and margin of safety in both upstream and marketing companies. Additionally, life insurance and select large private-sector banks appear attractive, supported by reasonable valuations, strong balance sheets, and potential benefits from economic recovery.
ICICI Prudential Value Fund has consistently been leading in its category. Which strategies have contributed to it?
Adhering to a disciplined relative-value framework, sector allocation, willingness to rotate capital when better risk-reward opportunities emerge and the ability to reduce exposure when optimism becomes excessive around a certain pocket are all factors which have worked well for the fund thus far. Importantly, the approach acknowledges that underperformance is inevitable in certain market phases. But over time, sticking to valuation discipline and margin of safety has helped deliver encouraging investment outcomes.
Growth, value, quality: What kind of investment philosophy should one follow amid high volatility?
Quality or blend of quality and value investment style generally tends to perform well during heightened volatility. Quality companies are those with a strong balance sheet and earnings. These companies remain resilient even during volatile phases. Value strategy generally tends to recover fast when there is an economic recovery playing out.
FIIs have been massive sellers this year and last. Can the sustained DII buying continue amid relentless selling pressure?
Currently, domestic inflows remain strong, but how far this trend will continue remains to be seen. From a macro perspective, India is well placed. Also, the Government, through its various measures have taken enough steps to fuel growth in the economy. Owing to the continuous selling from FIIs, valuations have become much more reasonable. So, given this combination of strong macros and reasonable valuation, we see little reason to worry at this point in time.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
