We have been consistent in what we have been saying that damage has happened, valuations have become cheaper. We are 20% down from where we were one week back. With 20% correction, what looks good or average with Nifty at 12,000, looks better at 10,000. One has to decide whether one is investing for six months or for three years.
Whenever there has been a crisis, one has to take a call whether India survives the crisis or not. If India survives the crisis, there can be many problems in the next 1-3 months. But if you have got a view that the virus itself and the impact of that virus will last for three months or six months or nine months, overall on a three-year timeframe, if you are buying at a relatively cheaper index level, you tend to make money.
Look at where the average P/E ratios are. If you look at the broader P/E ratios of 2021 — we say that it is at 16 — within that, there are two parts of the market. There are 10 stocks which are expensive. There are 40 stocks which are very cheap. Based on the 2021 earnings, it looks like they are available at 12 or 13 or 14. Suppose the analysts are majorly long, they are not available at 12, they are available at 15, then also it is a good valuation to enter.
The fear is high and we have always said that when the fear is high, when the news flow is negative, one has to be invested in India. Whenever sentiments are bad, the FII flows are negative, like now. The Indian flows (DIIs) have held on till last week.
Overall, we get a sense of what is happening in the market. Till now, the Indian flows are positive. Even if the Indian flows become negative and the market gets corrected further, I do not know what is going to happen in the next three days, five days, ten days. But even if the market gets to correct further, if you are buying at the valuation levels that are there today, one will have a good experience with three years in mind. Do not come with six months in mind but three years can be a good experience for the investors.
If you are hungry, you have two choices — you can eat pizza for instant gratification or quick gains or you can cook your dal makhni which will be pain first and gratification later. Is it time to start cooking the dal makhni or right now you can also eat a pizza?
I do not know the recipe for a pizza. We know only the recipe of dal makhni. So that is the only option. There is no other option. Even if a stock has got corrected and we would love and we would be buying today as we have been buying since the last five days. ICICI Prudential Mutual Fund has been buying consistently because our models are such that we start buying. Though we are buying, we do not know whether we are going to make money in the near term. But we believe at these valuations, we will make money over a three-year period. That is what I am repeating. There is no option but dal makhni.
What we can do is that we cannot predict where markets are headed in the short term but we can look at historically what have been the market behaviour indicators when markets have fallen 10-15% . Two factors which as a fund house you use is fear and greed and volatility. The ET Now VIX indication is 35, we went to these levels in 2008. It is not 2008. Then why is both local and global volatility reminiscent of 2008?
In a flow driven market which we have had, in the long term, if you see 10 year of the index, the earnings per share growth and the price growth have been very similar. It is around 7.5% if you take a 10 year range. But in the short term, in a flow-driven market if the flows are negative, it changes. In fact, you have not seen as much volatility as you could have seen because the Indian investor has held on. If you remember in 2010 to 2014, when I used to come to your channel, we used to continuously say and we used to come and give out advertisements saying that 100% of our funds have beaten benchmark.
I used to say it is relatively easier to make money because whenever there is a problem in the west and reaction in our markets, there is talk about decoupling of economies. So, whenever there is a problem in the west and our markets start reacting big time because foreigners are selling. It used to happen every. In 2010, we had a runup in the market. In 2011, the markets were down. In 2012, the markets were up again. In 2013 the markets were down. That was happening because the foreigners were selling or buying.
Again foreigners have sold in the last two-and-a-half months especially in the last one week and this is the reaction. Till now, the Indian investor has held his breath and he has been investing. But today, we are seeing a 20% correction and one has to see the Indian investors’ behaviour. We believe in contra investing and one of the indicators is that my balance advantage fund has an algorithm that we follow. Yesterday, it was 69% invested. It can go from 30% to 80% levels. As the market goes down, that index gives us the indication to buy more and we have to buy more.
69% invested in equities?
Yesterday and today it would be 72-73% invested. As I am talking to you, the model in my office has already decided that we have to buy because at every drop we have to buy. So today we will be buying.
These are proprietary indicators. It is derived from market behaviour and we are in extreme fear. This is our proprietary indicator. Every time we have been here, if you bought stocks in one year you have made money.
I do not want to say one year but I am reasonably confident that this indicator is working beautifully. Whenever the market is in extreme fear, positions people have bought, they would make money over a period of time because the valuations are supporting. Negative news flows are superb for making money in the medium term. I would not comment on the short term.
That is how the fear has moved. I am again and again going back to fear. Market is about sentiment and fear. The fear reminds one of 2008 but this is not 2008.
I was in the same job, I was doing the same job in 2008 also and the environment in 2008 was very different.
But you looked different in 2008.
Your appearance was different in 2008.
Yes I had some more hair on me that is all but I think 2008 also created… I lost a lot of hair in 2008. But I do not think we are anywhere near 2008.
We believe in contra investing and one of the indicators is that my balance advantage fund has an algorithm that we follow. Yesterday, it was 69% invested. It can go from 30% to 80% levels.
-Nimesh Shah, ICICI Pru AMC
Valuations is another thing which we can look at. Investing is about buying gold at the price of silver. When do you think markets tend to bottom out in P/E multiples, what is that yardstick?
When it is a flow driven market and when machines are deciding in the west how much to buy and how much to sell and when to sell, I do not want to comment on that. I do not want to comment on numbers because I do not know. Nobody can know where is the bottom and when it will be reached. They are getting redemptions and they have to sell. Their model is telling them to sell, they are going to sell. They are not going to look at valuations.
It is up to the Indian investors — whether we are going to buy at that point of time or not. Till yesterday, we have been buying, today also we are buying. So, there is still buying fire power in India. Either we are giving the foreigners an easy exit. The second points is, right now I feel that if we buy, it would be a good thing for the Indian investor to buy something 20% cheaper. I am not talking about a great return also. I am saying can we deliver or can the market deliver a double digit return from here is on a three year paradigm that looks more likely today than what it looked one week back.
Subprime was discovered in August 2007 and the market started correcting only in April or May 2008. Are markets telling you something which we are not able to imagine? We are celebrating decline in crude prices but the decline could be an indication of the world coming down?
There is a direct correlation between crude prices and Indian market. Ideally it should have been an inverse correlation but there would be a direct correlation. Again, in a flow based market, when they do a risk-off in US, a decoupling started at that point of time, but we are an independent economy. We are an economy where 70-80% of the consumption happens within the country. So to that extent, economy-wise, we are relatively independent compared to the rest of the world.
That I am completely a believer is true but when 25% of your market is owned abroad, for them it is a machine which is going to allocate into emerging markets and getting out of emerging markets. It has got nothing to do with India. One day, the machine decides that the equity allocation has to come down and the Emerging Markets exposure comes down. They are going to sell all the markets, it is not about India. So a machine is deciding over there. So, the markets cannot get decoupled. The economy can be decoupled but the markets cannot get decoupled because 25% of the market is owned abroad and if they decide to sell, then the market has to correct. The markets have become cheap and Indian investors have either models like us and will invest as we are investing and we will be investing more if the market falls further. Either models like that will keep investing or Indian investors have really become smart and see to it that the market is correcting. They believe that India will survive in three years time and if India survives in three years time, our economy and our businesses will do better and will follow a reasonable average earning per share.
Remember today’s earning per share does not contain some of the private sector banks or the government banks which are coming back into profit. When you see that data, the market looks better and that data will come in 2020-21. In the value part of the market, there is one anomaly. Quality at any price has worked in the past. We have stayed away from quality at any price.
When you are investing in a mutual fund, see at what PE you are buying. If you are buying a fund at a lower PE, that is much better than buying a fund at a higher PE. I would rather look at if it is a good well managed fund house with good investment capabilities then buy a fund with a lower PE which can make you money over the next three years. There are some sectors which have been completely ignored by the market.
Coronavirus or no coronavirus, will India need power? If India needs power, if the biggest power company in the country is available at a single digit PE with a very high dividend yield and as the government has already said that ROE has to be 15.5%, as the they make more power, they will make more money. We believe that the power companies which survive and especially the biggest utility companies of the government, will make a reasonable amount of earning per share growth in the next three years.
We can see the numbers despite coronavirus. Business after business, can we estimate the earning per share? We are the followers of earning per share (EPS). What are we paid for? Our customers give us fees for estimating EPS over the next two to three years. So, we are doing our job. Keep your line and length, that is what we do like it is in cricket. At some point of time, the environment will change and you will get the swing and you will get the wicket.
Will you bat on the front foot or the back foot?
I will bat for volatility. I will bat from my crease. I will not go out of the crease on the front foot; neither will I go on the back foot. I will look at the balls and accordingly play and I will be prepared for volatility.
Can you define that?
If the Nifty corrects 1,000 points more, will I be buying more? Yes, I will be buying more because I believe that in three years’ time, there will an India which will be robust, which will be able to manage. This could be a three-month problem or a six month problem, I do not know how long, but it is definitely not a permanent problem. So if the good companies of India are available at single digit PE, I will go and buy and stay for three years and that is what I will recommend also.
Is this the time to increase your SIPs?
Increase your SIP or increase your systematic transfer plans. That can be worked out where you can invest in the next month. I am not saying that invest over three years. I have always rooted for the balanced advantage fund, so that you do not get much downside. It has worked well for the investors.
Even today, as we are talking, the last five years’ balanced advantage fund has done a good job for the investors. Going forward, the best way is to put the money in today can be decided based on volatility. It can be decided whether to increase or decrease allocation on equity. So, balanced advantage fund.
Otherwise, I will say invest over the next three months. Do not wait permanently. It is not a three-year call now at the current valuation. As for value stocks, even in Nifty 50, remove the top 10 companies and the market is quite cheap. The remaining 40 stocks are quite cheap. Metal stocks are quite cheap. Metals are not going to remain permanently down and if you see the data from China, the pollution levels in China is increasing and that means China has started producing. So though I would not comment on the virus part of it, I believe ultimately the world will survive.
Economic activity is normalising in China is what we understand. It may be a shutdown in Italy. Italian coffee stores may be closed but the Chinese coffee stores are opening?
So will metals do well ultimately? Whenever you have bought cheap, whenever you are buying power plants at much lesser than their book value, historically, you do not seem to go wrong.
When TMT crash happened, infra made a comeback; when infra corrected, you had a comeback in consumers. When the taper tantrums started, smallcap stocks did well. What should one buy now? Which stock, category or asset?
We have started a thematic fund of funds in which we decide which ideas we will invest in. The thematic fund has invested in infrastructure, in opportunities fund, special situations. This is the time to buy ICICI Prudential. If you want to do allocation to equity, I will thump the table and say that this is the time to buy ICICI Prudential Special Opportunities Fund. There are problems that we face right now. My business will face challenges, your business will have challenges but both our businesses are going to survive because we are adding value to the country.
So is it a temporary problem or a permanent problem? Will I invest in infrastructure companies today? Yes I will. Will I invest in metal stocks today? I will. Will I invest in pharma stocks today? All these sectors have not done well in the last three years. Will I invest in those three sectors today? I will invest in those sectors.
Will you stay invested in telecom which has worked like a charm for you?
In telecom, we are remaining invested. There are only two good companies. We had taken a big call in one of the companies and it has…
I have been told that you have got a $1-billion plus holding in telecom now?
That is our highest holding. Our highest holding is in one of the telecom companies and we remain invested because we believe that the good times of telecom industry have just started. Most people are using data and India is not paying so much. Today all of us are buying data very cheap. We are used to free and from free to we were being charged Rs 100 on an average. It is too cheap. We have to pay more for data and when we pay more, the telecom companies will make much more money than we are making today.
I still believe that telecom companies in India are cheap. From 13 players, we have reached three players and I believe it is a fantastic time to invest in telecom companies.
A logic given to us in the last 10 years has been that liquidity is surplus and as yields are coming down, there is going to be a mad scramble towards emerging markets. Right now, yields are at a historic low and they may remain like this. How does one figure out what to do? What not to buy when growth is coming down and yields are coming down?
It is relatively easier to get value picks. Investing was difficult in a market of 12,000. Investment is relatively easier at 10,000. You require guts to do that, you require experience to do that. Over a period of time India can manage its problems. The basic thing is as an investor, do you believe that India will manage its problems? Is India going to crash? That has never happened, we have got a 5000-year history and I think we will find solutions. So I am very optimistic. We have faced challenges but we will overcome those challenges as a country.
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Nimesh Shah on why ICICI Pru AMC is a buyer in this market rout have 3315 words, post on economictimes.indiatimes.com at March 12, 2020. This is cached page on Game Breaking News. If you want remove this page, please contact us.