Investors should avoid oil, auto, realty cos: ICICI Pru

Puneet Nanda, CIO, ICICI Prudential Life Insurance, said the market sentiment is better than it was in March. "It is likely to move 10% on both sides."

Banking has shown the best earnings growth among all sectors, Nanda said. Investors should avoid oil companies, he added.

Excerpts from CNBC-TV18’s exclusive interview with Puneet Nanda:

Q: What is the prognosis for this month?

A: The headwinds are pretty confusing. The big concern for Indian equity markets right now is inflation, primarily commodity and to some extent food prices. The global scenario though is looking much better than what it was a couple of months back. So, I would say that global cues are better.

The result season is just about over and is broadly inline. Earnings of some sectors have been good and some not so good. In the short-term, the view is quite confusing to say the least. There is a slowdown in corporate earnings growth, which will remain at about 15% and that is the kind of expectations one should have, because in the long-run, markets will reflect the corporate earning growth rate.

Q: How are you feeling about this entire commodity scare because it has already shown up on the inflation figures? Do you think it will soon start showing up by way of business inflation and growth targets being scaled down?

A: It is a big issue, and a very big concern. Unfortunately, it is an issue not just in India but around the world. Although the government is trying to take a lot of steps, there is not much that the government can do in India, inspite of all the steps to try and control prices or directing companies to do that.

Globally, demand far exceeds supply. Our own analysis shows that it is more investment-led demand than consumption-led demand. There is a lot of speculative elements being built in, so to that extent globally there were a lot of people who were playing the long-inflation short-dollar kind of trend. As long as the dollar was weakening, interest rates in US were coming off. It was a trade that worked well.

Now, given that the Fed is pretty much at the end of its interest rate cycle, the dollar has also started appreciating. So, some of those positions will be unwound and if that happens, then over the next three-six months there is a pretty good chance of some amount of softening in commodity prices.

Q: In the interim, while the market is a bit confused and indecisive, what would be your strategy in terms of investing in the market? Would you infuse fresh capital or just churn around your portfolio?

A: No, at times like these it is best to think about fundamentals. It is best to think a little bit longer-term, so take your calls based on valuations rather than on the noise in the market. Unfortunately, because of so much newsflow that keeps coming around, we tend to get swayed by what is happening in the short-term and losing sight of the long-term. It is a good time when clearly there is no view in the short-term. So, one should focus on the long-term and then take one’s call based on fundamentals.

Q: What about the rate sensitives right now, how are you approaching them?

A: Among the rate sensitive sectors, one is banking, the other is perhaps real estate, then auto. There are different dynamics playing in each of them. On the banking side, it is more because of concerns on derivative and things like that, which are completely overblown. This sector was beaten up very dramatically over the last two-three months. But as the result season has shown, the impact of these events is very minimal. If anything, the sector has shown the best earnings growth across all sectors. For the market as a whole, earnings growth is somewhere around 18-20%, but for the banking sector it is twice as much. So, that is a sector worth looking at inspite of what is happening on interest rates.

There are different issues affecting the other two. If interest rate soften, then real estate is going to benefit but there are issues on valuation as well as on the amount of absorption that is possible given the supply that is coming up. In fact, there are concerns on the execution front. Because of that the views there will be conservative.

On the auto side, again interest rates would have helped. Right now, the interest rate view is at best neutral. If anything, the consensus is building towards slightly higher interest rates from here on, plus the fact that there is a margin squeeze. So, the view is not so great on the auto sector either.

Q: As a space, how are you approaching oil and gas from the listed stock universe?

A: It is a very tough call to take, given the way oil prices are moving up. One would have liked to take a definite call on that. But the fact is that in India prices have got nothing to do with what is happening around the world. It is completely controlled by the government and today also there is this news report about them being asked to bare more losses.

So, the prognosis clearly is not good for the oil companies in general. For the economy, there is some good news as the pain has been postponed. The immediate pass through is not going to happen and hence the economy is not going to bare the pain. Of course, there will be cost in terms of higher fiscal deficit and lot other problems will come later. But at this point, it is best to stay away from oil companies.

Q: Sentiment seems to have got a battering this year for equity markets, what is your sense of how retail interest might move from here? Do you think people will start leaning more towards fixed income products and probably not so much towards an equity-linked one?

A: Right now, it is very difficult to say what will happen. For the first time, we are seeing a downturn. Over the last three-four years, we have seen some sharp corrections including the one in May 2006. Initially, people get worried and sentiment takes a battering, but eventually people do realize, and that realization has daunt pretty effectively, that in the long-run if one has to beat inflation and meet one’s financial goals -whatever those goals maybe – then one cannot stay away from equity.

The adherence to one’s ideal asset allocation becomes even more important in times like these, i.e. what we think our customers believe in and that is what we try to propagate. The sentiment is not so great but if you look at it from where it was in March, since then there has actually been a decent rally in equity markets. I would say sentiment is not as bad as it was in March. If things stabilize from here and there are chances of the markets stabilizing, I am not saying the market is going up sharply, but it will stay in a plus-minus 10% range. Once that happens, investor interest will start getting revived.