Where should you invest in 2023? ICICI Prudential AMC’s S Naren picks best bet

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S Naren, ED and CIO, ICICI Prudential AMC says he is positive on debt as it has become an attractive asset class given the high returns it offers amid rising interest rates. When it comes to equities, he is also positive on manufacturing, healthcare and financial services. In a freewheeling interview, he shared with Business Today what will define the markets in 2023.

BT: What’s your big call on the asset class?

S Naren: Given the widespread perception that investors should only participate in equity, there is a big demand that investors should invest in debt as well. In India, credit has increased by 20 lakh crores in the last one year, and the government has a net borrowing program of 12 lakh crores, of which 6 lakh crores will come from the insurance industry and other sources. Banks will have to provide balance lending of about Rs 6 lakh crore. Meanwhile, deposit growth is just Rs 15 lakh crore from the required Rs 26 lakh crore. Therefore, there is essentially a shortage of funds in the debt market. In the past, asset classes with little investor interest have performed well over the short to medium term. A similar trend was visible three years ago in Telecom, Metals and PSUs. Investors were reluctant to invest in these sectors and these are the sectors which have now given strong returns.

However, given our demand on debt, this does not mean that we are negative on equity. What we are saying is that we are positive on debt because it has become an attractive asset class given the high returns it offers amid rising interest rates. Furthermore, debt is interesting based on the investment principle that one should invest in asset classes that are facing a paucity of investor interest. Here, investors can consider categories such as dynamic bonds, credit risk, savings, ultra-short for debt allocation needs.

BT: For 2023, what should retail investors be on the lookout for?

S Narine: Our mantra for 2022 was about practicing asset allocation and being systematic with equity investments. Now, in 2023, we are continuing the same and have added that investors should consider investing in Debt Mutual Funds.

BT: Does this mean tilting the asset allocation towards debt?

S Naren: No, we are not asking investors to tilt their portfolio towards debt. Due to the low returns debt funds have given in the past, investors should not ignore the future potential opportunities present in debt funds. In the last two years, retail investors have largely opted for equity and hybrid funds. Barring debt index funds, there was hardly any net inflow into debt mutual funds. Also, investors should continue with equity SIPs and invest within the asset allocation framework.

BT: The returns from debt mutual funds have been around 4 per cent in the last few years. When you say invest in debt funds, what kind of returns should you expect going forward?

S Naren: Debt today has a better opportunity to generate risk-adjusted returns than in the last three years. Ahead of 2020, as was the case with metals and PSUs on the equity side, with rates rising, the credit outlook is set to improve.

We also need to remember that between 2008 and 2021, we had 13 years of quantitative easing by global central banks. During this time, corporate India could easily borrow globally at very low rates (close to zero). Today, this is no longer the case given that banks have moved towards quantitative tightening and rates have gone up. This will translate into corporates borrowing more domestically which is another reason why debt becomes interesting.

BT: What is your outlook on the equity markets?

S Narine: We believe India presents a very good structural story, stable economy, and hence is currently overvalued. Among Large Cap, Mid Cap and Small Cap, we are currently positive on Large Cap and Flexi Cap category. Following the sharp selling by FIIs, large caps are better valued in terms of valuations than mid and small caps. Given this setup, staggered investment through SIP is likely to assist investors in their wealth creation journey.

BT: From your basket of funds, which fund would you recommend to investors?

S Naren: If one is investing through SIP then they can consider investing in aggressive categories like mid cap, flexi cap, value, special situation or small cap to take advantage of potential volatility in these pockets . On the other hand, if you are looking for a lump sum investment, we prefer asset allocation oriented or hybrid category offerings given that equity markets are not cheap. Loan can also be considered for lump sum amount, especially for short term and accrual strategy schemes.

BT: What strategy would you recommend going forward? Will it be speed or price?

S Naren: It’s hard to predict whether that will deliver momentum or value in the coming year. At this point, we believe that investors should focus on asset allocation strategies. The price was very affordable three years back which is not the case now. We believe that precious metals like gold and silver are likely to do well once the US Fed stops hiking rates. We were of the view that this call would go long, but some precious metals have already rallied significantly.

BT: What themes are you considering for 2023? Especially in light of the government’s focus on manufacturing?

S Narine: We are positive on manufacturing, healthcare and financial services. Over a 12 to 18 month perspective, we believe systematic investments in export-oriented sectors such as IT can deliver returns as the slowdown fears will subside by then.

BT: After the last Fed rate hike, the RBI MPC is due this month. Do you think they will raise rates or are we near the terminal of extreme rates?

S Narine: We expect rate hikes by both RBI and US Fed in the next round of meetings. But after this, it has to be seen how fast the central bank increases the rates further. In India we believe that unlike the western world, the balance of trade is of more concern than inflation. We could have managed inflation better had India not engaged in excesses in terms of printing excessive money or reducing interest rates to near zero. However, the slowdown in advanced economies and rising oil prices are negatively impacting our trade deficit.

Read also: What makes HDFC Bank and HDFC merger a win-win bet? CFO S Vaidyanathan explains

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