The US Fed rate hike and increasing cases of new Covid variants are among the major risks for the national stock market in 2022. Business Today met with S Naren, ED & CIO, ICICI Prudential AMC to understand which sectors could offer a solid return to investors despite the volatility and what strategy to adopt to make the most of the new year.

BT: What kind of return do you expect from the stock market in 2022?

S Naren: Over the past decade, easy liquidity conditions and rate cuts by global central banks have created an environment conducive to strong equity market performance. However, it has now been indicated that global central banks may be moving towards a gradual withdrawal of excess liquidity from the markets. At a time when valuations are relatively high, this could cause market volatility to spike. Another development that could have an impact on the market is the news related to strains of Covid.

Amidst all of this, the bright spot from India’s perspective is that the business cycle has become largely supportive. Companies have deleveraged, the government’s budget deficit is under control, and the financial sector’s non-performing loan cycle is also under control. All of these are major positives at this point.

This translates into the fact that the period of making easy money in all asset classes is largely behind us. In such a context, investors should focus on respecting the asset allocation.

BT: What industries will be on your watch list for the New Year?

S Naren: We are positive on some of the domestic sectors such as autos and banking which appear to be fairly valued. Telecoms is another sector that we believe could be buoyant due to a multi-year upward cycle driven by a change in usage behavior, consolidation of industry structure, recovery of ARPU and the deleveraging of the balance sheet while the intensity of investments for the sector will decrease. Among defensive stocks, after the correction observed in the pharmaceutical space, we believe that the price of pharmaceuticals is reasonable. We expect valuations in the domestic pharmaceutical segment to remain strong as M&A / PE deals continue to remain healthy. An improvement in margins thanks to cost optimization is expected in the coming quarters. Utilities are another pocket we are positive about.

BT: What could be the most important investment theme for the next year? How to play it?

S Naren: With the likely withdrawal of stimulus measures coupled with the dynamic environment of global and domestic markets, more active management may be required to navigate the equity market. Thus, a combination of active management and multi-asset strategies is likely to provide a better result in the short term.

Through a multi-asset strategy, an investor has access to various asset classes such as stocks, debt, gold and international stocks, all within a single fund. We recently launched ICICI Prudential Passive Multi-Asset Fund of Funds, which provides exposure to all of the asset classes I mentioned. As this is passive management, the offering of investments in all asset classes will be via ETFs / index funds. The program is capable of investing in any ETF / index fund launched by any other mutual fund in India. For international equity exposure, the universe consists of 30 well-researched global ETFs that invest in world / country and theme specific ETFs. Through this fund, we aim to offer a simple investment solution offering a mix of different asset classes.

BT: Do you think mid and small caps can continue to outperform large caps in 2022? Why or why not?

S Naren: Large caps are likely to lag behind until the sale of FII continues. But from a medium term point of view, large caps are much more attractive than mid and small caps.

BT: Name three factors that would drive the market in the future?

S Naren: We firmly believe that the fixing of interest rates by the world’s central banks is the most important factor that will drive equity returns over the next few years. From a macro perspective, inflation could persist but should not be viewed as a major risk. Historically, when inflation is at manageable levels, it stimulates economic activity. At these times, companies tend to sell goods at a faster rate.

BT: What are the two big risks that can drag the market in 2022?

S Naren: The amount and pace of the U.S. Fed’s rate hike and the severity of new Covid variants are potential factors that may weigh on markets.

BT: What should be the right composition of the portfolio given the current market scenario?

S Naren: Rather than focusing on a single asset class, opt for strategies that allow an investor to gain exposure to multiple asset classes. If you are considering an equity-linked investment, choose plan categories that have the flexibility to invest by market capitalization and themes.

BT: In your opinion, what type of shares can be bought in the event of a correction?

S Naren: Currently, the mood among retail investors is high. Investors opt for aggressively priced IPOs without considering such factors as trailing price to earnings, slipping price on book value, dividend yield and ROE before investing. This is a worrying development. If you are going for direct investing, it is advisable to invest in profitable and fundamentally sound names.

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