ICICI Pru’s S Naren bets big on cyclicals; select lenders, telco and utility stocks top picks

With India sticking to localized curbs instead of a nationwide lockdown amid the deadlier second coronavirus wave recently, the impact on economic activity and businesses has been much lower, according to Sankaran Naren, chief investment officer at ICICI Prudential Asset Management Co. The firm oversees about 4.1 trillion rupees ($56.6 billion) in assets.

“India is yet to see a cyclical economic recovery and the business cycle is not as elevated as we see in some of the developed world,” Naren wrote in an email interview. “Unlike in a deflationary economy during which sectors like consumer staples and high-quality names gain, the current environment is best placed for cyclicals to do well.”

Bloomberg

Stocks in India have climbed to record levels even as it grappled with the worst of the health crisis, as investors continued to snap up shares on optimism over the economy’s long-term growth potential and central bank stimulus. The Reserve Bank of India this month expanded its version of quantitative easing and said it expects gross domestic product to grow 9.5% in the current fiscal year.

Meanwhile, infection rates in India are now falling. New daily cases on Tuesday fell below 100,000 for the first time in two months, down from a peak of more than 400,000 in May.

“The Indian business cycle is attractive given that corporates have deleveraged, credit growth is very low, the capex cycle is yet to revive and profit-to-GDP ratio is low too,” said Naren. “On the other hand, U.S. corporate profit-to-GDP ratio is high and the country has pursued extremely aggressive fiscal and monetary policy.”

New Fund
Focusing on cyclical and value stocks has already shown results for the money manager. The ICICI Prudential Opportunities Fund directly managed by Naren has returned 36% year-to-date, beating 96% of its peers, data compiled by Bloomberg show. Wireless operator

., power-generation firm and were three of the fund’s top five holdings at the end of April, the data show.

While the immediate focus for investors is the pace of India’s vaccine rollouts and its recovery from the pandemic, Naren said that one of the biggest risks to local stocks could come when global central banks take steps to taper their buying program significantly.

“At that point, we expect to see a meaningful correction in asset prices and economy,” he said. “One needs to be cognizant of the fact that Indian equity valuation is no longer like what it was in March 2020.”

The combined value of all shares traded in India recently rose above $3 trillion for the first time, burnishing its status as the world’s eighth-largest stock market. The benchmark S&P BSE Sensex is trading at about 22 times its 12-month forward earnings estimates, versus a five-year average multiple of 18.5 times, data compiled by Bloomberg show.

ICICI Prudential Asset Management is preparing to launch a “flexicap” fund by the end of this month, which Naren said will give it the freedom to deploy money across large-, medium- and small-size companies in the initial year, when the market is likely to be volatile.