Focus On Asset Allocation Instead Of Market Correction, Says ICICI Prudential's Anand Shah

Anand Shah: So I'll give you a little bit of a cliched answer that, you know, look, the expectations from the market will have to be far more muted than what we have seen in the last few years. The reason being, when we go back to 2020, we also had quite a few inefficiencies in the market. More importantly, we had a subdued five years in the market. So we were starting from a low point in terms of past returns, and that is generally very good news for the future returns. Now, today as we speak, we are sitting on very hefty profits in the market. But I think more importantly, we had almost a decade of consumer-facing businesses doing very well and manufacturing and allied businesses doing relatively soft growth. To that extent, the market was fairly skewed also. So not only was the market inexpensive, but within the market, there was inefficiency where consumer-facing businesses were darlings. They were at a very high P/E multiples, price to book multiples. At the same time you had this old economy slash manufacturing, businesses were trading relatively cheap. Now that inefficiency is also fairly reduced. The consumer-facing business still remains more expensive than manufacturing, rightly so, but nevertheless, that gap has reduced. So in that sense, the inefficiency in the market over the last few years has reduced, and that means that there's so much less money to make in the market incrementally.

Anand Shah: I think that's good news. The good news is that across the board, market participants, bearing few, are cautious. So you hear fund managers from mutual funds, you hear distributors, you hear you know, and when we meet investors, people are fairly cautious. People are saying, Look, we want corrections and it is rightly said that the regulator is also conscious of the risks that are sort of increasing by the day as the retail investors become fairly more confident in the market today than they were four years ago. So I think that's good news to me personally. I believe that makes it much healthier. To be very honest, a correction would make the market much healthier.

Anand Shah: So I think, in that sense, I'm looking at all these developments more positively than negatively. Having said that the market is not obscenely expensive, there is a frothy part of the market and that froth has to be in a way curbed to protect the retail investors who would otherwise get sucked into those schemes. So I think, all in all, I look at these steps as more positive for the markets if that leads to a market correction. I think that's the key. A market correction would be more healthy than anything else.

Anand Shah: So again, you will not like me for saying this. But in the 34 years of history that we have seen, markets used to correct very healthily, used to correct more than 20% every 13th or 14th month on average, and markets used to correct almost 10% once, twice or maybe thrice a year. That something is missing. We have not seen deep corrections in the market since 2020; we haven't seen a 20% correction, and we have still seen only one 10% correction. So I think we would want to see, before committing money convincingly into the markets, maybe a 10 to 20% correction; that's something that would make the market that much safer.

Anand Shah: So again, that's the other thing we've been telling everybody: don't wait for the market corrections. You need to have your asset allocation in place. So don't just sit on cash because you're convinced that the market is going to correct. The market might correct a year later, one and a half years later also. My point being that a healthy market would generally tend to correct every now and then. It will make it more healthier. But that doesn't mean the market corrections are imminent because if you see the last five years, four years, while the markets have done well, corporate profits have also done very well. If you see profit to GDP for Nifty 500 have moved from something like 2.6% 2.4% to 4.8%, Nifty 500 PAT growth, and a CAGR for the last four years in excess of 30%, so you have tailwinds also. More importantly, as we see, you have the U.S., you have Europe and you have China. The three largest blocks of the economy are cutting interest rates together at this point in time. So it's not imminent that the market will correct. My point being that one needs to be cautious in the market at this point in time and focus on asset allocation. Neither side. You need not be in 100o not need to be 100% in equity.% cash. You need not be in 100% equity.

Anand Shah: Sure. So before I come to this, I think one more additional data point would be good to see that when we were looking at this number, sometime in the third week of September, when the market touched new highs, there were only 95 stocks out of Nifty 500, which were within 5% of the all-time high. So the market's already correcting internally. We have more than 250 stocks in the Nifty 500, which are more than 10% down. Some of the stocks are down more than 30% and many of the sectors, like PSU Banks and others, have peaked way back in June. They have not touched new highs. So I think the market is, in a way, also correcting while it's touching new highs internally. Coming back to what we like today in the market, we still like manufacturing, again, more bottom-up. As I said, the inefficiencies at the sector level, at the market level, are not very high to say that I like this sector. Barring banking, where both private banks and PSU banks, after the near-term consolidation and underperformance to the market, look broadly okay. But beyond banking, when we go into other sectors, there will be more bottom-up. We like space, like manufacturing and allied businesses, be it capital goods, be it power utilities, T&D, or transmission. I think everywhere we are seeing bottom-up opportunities to still participate in growth. Within consumption, we've been underweight products but the services. So I think there's a clear trend, and that's seen globally, that as per capita income moves, the consumption pattern moves from products to services.

Anand Shah: One, when I'm saying services, it includes travel, restaurants, and education, but also rightly said that within the products also the way we are consuming is changing from unorganised to organised. So our portfolios have more of these consumer services businesses than the products. Products, I think the penetration will happen to the larger middle class; the way is shifting, and we are sort of tracking that into our portfolio.

Anand Shah: I think I.T. we've been underweight for a while now, so I.T. had a big bump up, both in growth and valuations during the Covid time, 2020-2021, and since then, we've been sort of underweight, knowing or thinking the way we believe that the growth rates cannot be as good and the multiples cannot be that high. But trust me, till then, there is not a single month, not a single day when people have not asked me about I.T. So to be very honest, I.T. has never gone out of flavour.

Anand Shah: So yes, I.T. has been a strong business. They generate a lot of cash flow. Unfortunately, they don't have a lot of growth opportunities to invest that cash flow. So that cash flow is being used to pay out dividends, to a lot of buybacks. So in that sense, the I.T. sector, to me, is more of a slow to medium-growth industry from here on, and for that, the valuations continue to remain rich. So I haven't found valuations attractive enough for I.T. to plunge in, but otherwise very, very strong businesses and balance sheets.

Anand Shah: So again, I think the more important question isn't 25-35 or 45 stocks. There is a merit in diversification. Nothing wrong with that, as long as you know those companies are worth buying. So to be very honest, the important question is, do you understand the business you're buying into? Do you believe or trust the management that's backing that business? I think we have this BMV model. We look at business management and valuation. We need all three in place. It's not either or when it's strong businesses that can survive a downturn and thrive in the good times. We need management that is capable, the corporate governance issues are addressed and last, but not least, valuations. I think if you're looking at all three, the number of stocks where we are more convinced today might have reduced, given that some of the stocks would have become fairly expensive, and to that extent, maybe we have a littleentrated portfolio is significantly riskier and requires a greater amount of research compared to other options. more concentration. But I don't think that's the advice I would give to anybody and everybody. It needs to be well researched. If you don't have research, then you are better off owning more companies than less. The concentrated portfolio is much more riskier and needs much more research than otherwise.

Anand Shah: I think corrections have been fairly stark. Some of them have come into the buy zone. But again, as I said, even within the sectors we like, we are more bottom-up. Ditto for PSUs; I think there are still companies within PSUs that might not have strong fundamentals or might be very expensive. So I can't say generally for PSUs, but we own quite a few PSUs in output, and we have been sort of incrementally looking at some of the PSUs that we have sold; have they come back into a buy zone and continuously evaluate that?