It’s important to focus on companies’ fundamentals when investing in stocks: Anish Tawakley, ICICI Prudential AMC At this point, we are more focused on ensuring capital protection and managing downside risks rather than chasing returns. Much of the potential upside is already reflected in the market. Hence, it is crucial how we manage risk now," said Anish Tawakley, ICICI Prudential AMC
Asset allocation products like balanced advantage and multi-asset funds are good options for investors at this point, Anish Tawakley, CO-CIO, Equity, ICICI Prudential AMC tells ET Wealth.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Is the market on the edge, or is there a further runway to climb higher?
Valuations are fairly rich right now. At this point, we are more focused on ensuring capital protection and managing downside risks rather than chasing returns. Much of the potential upside is already reflected in the market. Hence, it is crucial how we manage risk now. It might be more of a consolidation phase in large caps. However, in the small- and mid-cap space, downside risks are much higher. We have seen many investors entering this space with limited experience and very optimistic projections. A lot of promoters are taking advantage of the market environment to dilute their stake.
Will the US economy achieve a soft landing, or is a recession inevitable?
I’d say the US has already had a soft landing. Whether you look at CPI or PCE (Personal Consumption Expenditure) inflation, both are below 3%, with PCE at 2.2%. The unemployment rate is around 4.1%. This is not just a soft landing; it’s close to a perfect landing. We never held the view that recession was inevitable. The only time recession becomes inevitable is when inflation expectations need to be reset downwards,which often requires creating conditions of higher unemployment. That’s why even when inflation was running high at 8-9%, we didn’t say recession was inevitable because inflation expectations were still under control. As long as that remains true, recession isn’t inevitable.
What big calls are you making now?
Given our concerns over valuation levels, it’s hard to find entire sectors that are attractive right now. Instead, we are more focused on identifying areas where we have concerns. For example, we are concerned about the FMCG sector. I think the earnings expectations are too high, especially when you consider that operating margins are likely to normalise. I expect to see some downgrades in earnings expectations in that space. Another area of concern is metals, particularly iron and steel. While I’m optimistic about China’s economic recovery, I don’t believe it will be driven by infrastructure or housing, sectors that demand a lot of metals. Instead, the recovery is likely to be more consumption-oriented, which would put less demand on metals. Additionally, I’m cautious about the IT sector. This is the first time we have seen Indian IT companies report weak growth, even as the US economy remains strong. Even if the Fed cuts rates, I don’t see why it would suddenly trigger a surge in IT demand. It’s important to delve deeper into the reasons that are causing softness in this sector.
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You mentioned a strong domestic cyclical recovery three years ago. How do you view it now?
Three years ago, it was clear that we would see a strong domestic cyclical recovery. So we invested heavily in sectors like automobiles and cement. Now, however, many of those calls have played out. While we still have some exposure to domestic cyclicals, we are being more selective. The key issue is that some stocks are now pricing in unrealistically high margins. In the early phases of recovery, bottom-line growth typically outpaces top-line growth because companies are using spare capacity and operating leverage leads to margin improvement. As capacity utilisation peaks and new capacity is brought in, margins tend to moderate.
Will the market favour growth stocks now?
We are in a capital protection mode. We don’t want to chase aggressive returns. What worked recently was value investing, which had a good run after a long time. However, there aren’t any obvious cheap stocks left. Hence, we are looking at stock-picking on a case-by-case basis, rather than relying on a clear value versus growth cycle. It’s more of a stock-picking market now. Some growth stocks might do well, but expectations are high, and not all will meet them. So, I wouldn’t say the cycle is clearly shifting to growth, and I don’t see it being as clear-cut as in the recent past. It’s more important to focus on individual companies’ fundamentals. We have always believed that different styles can work and, at ICICI Prudential AMC, we have a mix of styles, including growth and quality. While we’re often labelled as a ‘value house’, we are, in reality, more contrarian in our approach on a broader level. We don’t avoid expensive stocks entirely, but we prefer to buy them after their prices have fallen.
Your flagship fund, ICICI Prudential Bluechip Equity, has done very well recently. What has worked for it?
One could possibly attribute it to avoiding big mistakes, especially in large caps, where multi-baggers are rare. Looking at things both from a top-down and bottom-up perspective has worked well for us. Taking a barbell approach to stock-picking has also worked favourably. At one end, we focus on buying cheap value stocks where we expect mean reversion, and at the other, we invest in stocks that offer both growth and quality.
How are you positioning your small-cap fund?
We are cautious and hold a significant portion in cash and large or mid caps. Our small-cap exposure is less than 70%, with the rest in large caps, mid caps and cash. We believe the market is irrational right now, and you can’t outperform while remaining rational in an irrational market. Hence, we are not chasing returns and focusing on capital protection.
How do you view momentum investing?
That’s not our core investment philosophy. We believe that if you like a stock at 100, you should like it less at 200. We focus on managing risk and exiting at the right time rather than increasing positions when a stock is doing well. Momentum can be useful for timing an exit, but not for entering positions.
Your recommendation for investors?
Asset allocation products like balanced advantage and multi-asset funds are good options at this point. These funds adjust to market conditions and offer more stability during uncertain times.
The Author is Anish Tawakley CO-CIO, Equity, ICICI Prudential AMC
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This story originally appeared on: India Times - Author:Faqs of Insurances
