Keep your cool; bet on BFSI, organized retail, chemicals: Jitendra Arora, ICICI Pru Life – Economic Times

For those investing in Indian equities, 2021-22 has delivered stellar returns even as the end of the year witnessed significant headwinds in the form of the war in Ukraine and an unequivocally hawkish tilt by the US Federal Reserve. While these risk factors persist in the new fiscal year, headline equity indices by and large have started off on a strong footing, led by the news that the HDFC twins would join hands to create a new financial sector behemoth in India.

At the current juncture, Jitendra Arora, EVP and Senior Fund Manager, Equity, ICICI Prudential Life Insurance, is bullish on the banking and financial sector, saying that penetration of services should witness growth due to increasing digital adoption and pent-up credit growth. He also expressed optimism on certain discretionary sectors – “organized retail for its structural growth prospects, auto ancillaries due to the current point in cycle, export-linked sectors like chemicals and select names linked to resumption of hospitality and entertainment.” Edited excerpts:

Benchmark indices have largely held firm over the last couple of months despite headwinds like the war in Ukraine. Where are you seeing the markets over the coming two months?
After going through two years of a roller-coaster ride where we have seen 40% drop and multiple fresh all-time highs, the indices have been consolidating over the last 6 months and may remain range bound for a couple of quarters. Couple of months is a very short period to take a view on equity markets, especially in the current environment, where we have geopolitical tensions on one hand and fears of new Covid-19 variants on the other. We prefer to approach markets from a medium to longer term perspective and like the Indian markets from a long-term perspective even though we have a cautious short-term outlook.

How should investors approach markets at the current juncture where we have several risk factors such as a hawkish US Fed, elevated crude oil prices and uncertainty on global growth due to sporadic COVID resurgences?
There are quite a few factors that are causing the market to be volatile. It includes geopolitical tensions, withdrawal of stimulus by central banks globally, and supply chain issues, due to Covid-19 lockdowns in China, which are further accentuating inflation-related concerns around the world. Geopolitical tensions are causing inflation in commodities globally, which is likely to depress economic growth for a lot of economies including the Indian economy, which in-turn could affect corporate earnings. The withdrawal of stimulus is causing financial conditions to tighten, leading to an increase in risk premiums. The interplay of these factors, along with current valuations in equities, is leading to higher volatility across markets. Investors should not react to noise around these factors while making their investment decisions. They should continue with their regular premium payments and not take any extreme steps.

What are the best segments on your watch for investment for 1-2 years?
It’s very difficult to call out the end of the current geopolitical tensions, an exogenous factor that is likely to continue to impact the financial markets. Till the current situation lasts we would like to remain cautious in adding any lump sum market risk as an investor. In such an environment accrual based products best preserve value. However, as an institutional investor we see value in quite a few names from a bottom up perspective and that’s where we are adding positions selectively. These names can provide significant upside in the next 8-12 quarters assuming that the current geopolitical tensions ease sometime in next 2-4 quarters.

According to you, which are the sectors that could outperform once some of the global factors are factored in?
From a long-term perspective, we remain positive on the Indian economy and thus on equities as well. The current geopolitical tensions can have some long-term ramifications too. For instance, investments in green energy may gather further pace as economies try to move away from the current dependence on hydrocarbons as a primary source of energy.

Supply sources may be redesigned to ensure that there is no excessive reliance on any one country or region for critical needs of the economy. These will open up new opportunities for investors. Talking about sectors to focus on, we are positive on BFSI (Banking, Financial Services and Insurance) because of the lower penetration of services that should witness growth because of digital adoption and the impending credit growth. We remain positive on some of the discretionary sectors like organized retail for its structural growth prospects, auto ancillaries due to the current point in cycle, export-linked sectors like chemicals and select names linked to resumption of hospitality and entertainment.

As a fund manager at ICICI Pru Life, what would you define as your investment mantra?
Our investment mantra is really simple – we believe in investing in long-term trends and betting on solid, clean managements. With a focus on risk-adjusted returns, our philosophy places equal importance on diversification and stock picking. Some of the filters we use to find value are: sustainable and growing earnings, efficient delivery of these earnings, efficient use of earnings delivered to fund future growth or returning capital to investors and reasonable valuations. We try to invest in businesses that have these characteristics. We are not believers in buy at any price strategy for good businesses as markets tend to exaggerate short-term performances thus providing good entry and exit points.