Sankaran Naren, ED and CIO at ICICI Prudential Mutual Fund, was a panelist at the Morningstar Investment Conference held last month in Mumbai. Here is an excerpt from the panel discussion moderated by Morningstar's director of fund research Kaustubh Belapurkar.
You recently spoke about how emerging markets shouldn't be looked at as a basket investment opportunity by foreign institutions, rather it should be a more country-specific approach….
The problem with emerging markets is there are countries like Taiwan and Korea which are more like developed markets. You have lot of commodity countries and you have countries which have very central economies like China which are all part of the index.
So I am surprised why the asset allocators in the western world have focused on such an amorphous category called Emerging Markets, or EM, because it is composed of all the different types of countries. And once you benchmark, you get all these countries as a result - one year Brazil will pull you down, the next year China will pull you down.
What do you think would be the key points why India as an emerging market could probably be an interesting destination to look at?
There are three factors responsible for the stagnation in the global economy: debt, deflation, demographics. India is in a superior position in all three.
In most of the world, except maybe the U.S., debt problems are still lingering. In India, the debt problem is slowly getting resolved. I think over the next few quarters whatever has to get resolved on the industrial corporate side is likely to get resolved. Maybe in a few years the extent of leverage in real estate is also likely to get resolved.
Deflation is behind us. I don't look at deflation from a consumer perspective because if consumer prices do come down – like, for example, if onion or potato prices come down, it's good for the country. But more from a wholesale price index point of view, metals and other things have actually gone up, so now the WPI is positive.
Demographics don't change periodically. India has one of the best demographics in the world.
There is a clear case for India on a standalone basis. There was a time when we recommended our global investing products. But recently, we have been keeping quiet because the Indian opportunity both in fixed income and equity seem to be better than the global opportunity.
You've always been a sort of a contra investor - looking at the other side of the bets in terms of where probably a large part of the market is ignoring. That shows up in the funds that you have been managing. What is your philosophy behind the way you pick those ideas?
Last year, for example, oil and gas and metals were the sectors I mentioned at the Morningstar Investment Conference that were contrarian opportunities. If you go back one year back and ask people what would happen to oil, you would get wildly low estimates. The same thing was true for metals.
Most of us in the audience can't stay without their mobile phones for more than an hour. For most, the mobile phone is possibly more important than what they have in their purse. So, I think that's a simple contrarian sector at this point of time given the way how important the mobile has become for people across the world.
A contrarian must do the calculations otherwise will end up buying some infrastructure or metal stock which will go bankrupt.
Over the six months we have been massively underweight technology because what we saw was that one of the main users - global banking companies, are in such bad shape that there is no way they can invest in technology. That has kind of played out. So, now, we're relooking whether the combination of the market cap and earnings justifies slightly increasing the weightage.
On a continuing basis contrarian opportunities will play out and they are contrarian because the rest of the street is not willing to accept it. So, at the time you're buying there has to be a discomfort, but that discomfort is only at the time of buying, not in eventual returns. In 2007, being underweight infrastructure was being contrarian and it played out beautifully. You always invest for the medium term when you invest through a mutual fund and I find that contrarian strategy has really helped.
How are you looking at the mid-cap side right now? Are you taking a more stock-specific approach?
Morgan Stanley’s Ridham Desai has written a piece called My Mid-Cap is Fine. As fund managers, including me, we believe that mid-caps are overvalued. But when it comes to the mid-caps that we own, we feel they are fine - not overvalued, are cheap and have potential. But he says this is something which happens whenever mid-caps do very well. Every fund manager across the world says “the midcaps that I own are fine”.
Having said that, it looks as though both mid- and small-caps are pretty overvalued relative to large-caps. But the large-cap index, the way it was constructed last year, had metals and oil and gas, which was responsible for that earnings going down there. This year, for example, tech hasn't been doing too well. So, there have always been sectoral reasons why actually the large-cap index has done badly, which doesn't seem to be there in mid-caps, because mid-caps, you don't look at it sector based.
Still, if I had to choose, I would tell people not to go in for small- and mid-caps today. We have 3-year returns of 150% absolute in most small-cap funds and more than 100% in mid-cap funds. If at this point of time you put in new money into that category, you normally don't make money. This is the past. So, someone has to now make the classic statement that this time it's different.
