DSIJ Mindshare

Look Beyond The Investment Cycle To Create Wealth

Sankaran Naren, Chief Investment Officer, Equity, ICICI Prudential AMC, feels that in order to gain value or create wealth, an investor has to look beyond the trading cycles of the sectors. He further suggests that investors having an investment horizon of three to five years would be benefitting from the value created by the equity markets.

Sankaran Naren Chief Investment Officer- Equity ICICI Prudential AMC

Over the last two decades, corporate India has presented many virtuous cycles of value to the equity market participants, like the phase 2002-2007 particularly led by cyclical sectors- banking and infrastructure, created significant value for investors. In the post 2009 phase, value creation was led by quality companies like consumer, health care and technology well in the value creation process of Sound exchange trading platforms, Indian equity markets. 

The government settlement systems, have been put in place brought in robust market regulations and and the entire model is executed in a way investment practices. In fact, India’s that even during the financial crisis, there healthy financial system to a large extent were no delays in payments. The processes insulated the economy from the 2008 have been designed to safeguard market financial crisis. integrity, and are responsible largely for driving the growth of Indian equity markets, along with stimulating investor- centric practices.

Even the brokerage costs and dematerialization costs have come down significantly. Overhaul of key legislations is another benefactor to uphold the markets, like recently the new company law has been brought in. This new legislation simplifies  the company law that was otherwise mired in complexities. It also weighs heavy on the corporate governance practices, making companies’ much more accountable for their actions now.

Incentivise The Investors

The main difference, between the two value cycles is that in the post 2009 phase, only foreign institutional investors participated in the cycle, whereas the domestic investors stayed away from equities. The domestic retail investors are overweight on physical assets like gold and real estate while being significantly under-invested in equities. In last 2-3 years, the returns on these physical assets are dampened.

Investors need to reduce their investments in physical assets and gradually switch towards financial assets, by stepping up their equity investments to participate in the value creation process. Fortunately, this appears to have commenced; Indian nvestors are slowly moving out of physical assets, and investing in bank deposits or fixed income, which is a good sign to start with. An increase in bank deposits will ideally ease interest rates which would revive the equity market sentiment.

In order to attract investors towards equity investments, the government should offer an incentive for long term investing in equities, especially via the mutual fund route, as the platform is structured well for retail investors. 

It ensures expertise and professional management, along with diversification benefits and an opportunity to invest through systematic investment plans(SIP) rather than lump sum investments. The industry was earlier facilitated by separate investment limits created under 80CC; however, now there are no separate limits.
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The RGESS frame work is a step in the right direction; yet needs to be broadened to include more categories of equity investors, rather than only the first time investors. It is extremely important for India to have an equity market where local flows play a bigger role. Tax incentives would certainly help but from a long-term perspective, we need to create an environment which promotes an ‘equity cult’.

The next value cycle: Mid & Small Caps The primary indicator of economic revival has to be better utilisation of existing capacities. Sectors like cement and commercial vehicle are operating at 70 per cent and 50 per cent capacities respectively. These unutilised capacities will have to be brought into use first. Then, all capacities that are suffering from lack of linkages, such as power plants without coal linkages and metal firms without mining linkages, need to be addressed.

 Once these issues are resolved, we can look forward to a revival in investment cycle. The Indian economy is currently, heading for the general election results 2014, outcome of which is uncertain. A stable government, in May `14 elections with an agenda of strong reforms would accelerate the process of economic recovery and boost market sentiment. Pro-growth policies, for generating employment would solve most of the country’s problem. If the scenario of unemployment does not improve, India will be left with a demographic curse instead of being able to benefit from a demographic dividend. 

On the other hand, if the new government offers better employment opportunities, and places infrastructure as a key priority, it will directly boost industries such as power generation, road construction and provide cascading benefits to the manufacturing and services sectors. We believe, that over the next three years, industrial production growth will normalize at 6-8 per cent. Mid and Small caps should do well over the next three years backed by growth in industrial production. 

Even though small- and mid-caps have rallied strongly in the past few months, the value differential is still significant. In fact, our sense is that the next possible value cycle would lie in the small and mid-cap segments.

 In a nutshell 

Our economy is poised to grow, with an improved current account deficit and tapering inflation, which would push the RBI to take dovish stance in months to come. The main reason for inflation remaining high was the steep rise in food prices. A good harvest of both kharif and rabi crops is likely to result in much lower inflation. In addition, non-food inflationary pressures have come down. Falling interest rates would augment growth for investment cycle. Equity as well as debt mutual fund investors, having an investment horizon of 3-5 years would be benefitted from value created by the equity markets.

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