ICICI Prudential Life’s Manish Kumar picks four themes for the next 10 years

Could China’s Evergrande Crisis Lead to a Big Reform?

There are a few drivers for the market on different horizons. In the short term, market valuations may be driven by fears – about an impending crisis, for example Evergrande – liquidity, and short-term earnings. Currently, we have an environment where liquidity is ample, earnings have been supportive, earnings expectations are high due to recovery from COVID-19, thus trading indices at P/E multiples which are higher than in the past. Is. As a result, a correction is expected by some investors, which is very natural. However, given that China has very tight controls on its economy, we believe that the Evergrande crisis cannot lead to a massive financial crisis on a global scale.

Is the realty sector headed for a multi-year bull cycle?

We believe that the real estate sector is expected to benefit in the coming years. The supply side has been shrinking steadily over the past few years and now the inventories are reduced in most of the markets. Demand has remained stagnant in the top seven cities, with end-users remaining bullish in the market. IT hiring in the last two cycles reflects rising primary demand (new homes) with a lag of two-three quarters and the last three quarters have seen strong hiring by IT companies. Apart from valuations, almost all the big developers now have a good balance sheet and have performed well in the past. Therefore, these developers can ramp up quickly.

Has the small-cap sector become riskier?

Small-cap stocks have outperformed large-caps in the past one year as the NSE Small Cap 100 index outperformed the Nifty 50 index by nearly 33% in the one-year period ended August 31. However, if we look at it over a longer period of 10 years, we find that Nifty has outperformed the NSE Small Cap 100 Index by about 1.5% on a year-on-year basis. The two have gone together over a long period of time with some lead lag. Hence, to say that small-caps have become riskier may not be fair. There may be an ideology that small-cap indices are trading at high multiples and are expensive and therefore risky. What we need to know, however, is that this may be due to the relatively low coverage of these stocks, as well as low earnings prediction in some cases. As a segment of the market, they throw up some good candidates for future winners and must continually look at this set to identify it.

Which theme will dominate the next 10 years?

We believe that the following disciplines will do well in the coming decade: The first is BFSI (Banking, Financial Services and Insurance). Increase in per capita income and penetration driven by digital adoption coupled with macroeconomic recovery/growth will put BFSI in a very advantageous position. Strong growth will be seen in both lending and savings/insurance. The second is technology; covid has accelerated the digital transformation journey of global enterprises. Indian IT companies will benefit from this multi-year technology spending cycle. The balance sheets and cash flow characteristics of top Indian IT companies are ancient. Digitally enabled businesses are here to stay and will become a major sector in the coming decade. Next is cement; After a decade of stop-start stagnation, India’s capex and real estate cycle is restarting. Cement offers a clean play on capex theme with strong balance sheet and performance management performance excellence. Lastly, we believe that the consumer remains an evergreen topic. The shift in market share from the unorganized sector to the organized sector offers an attractive long-term opportunity.

There is still no standard definition of what qualifies for an ESG. What is the meaning of ESG fund in this context?

ESG is a very broad term. However, investors are reaching a comprehensive agreement to identify outperforming companies on the ESG front with the help of third-party benchmarking and their own internal framework. As a result, we now have indices of these relatively better ESG companies. More and more money is being allocated for sustainable investment as a strategy. The data shows that ESG indices have given better returns than general indices globally over the last 10 years. At the end of 2020, $35.3 trillion in assets globally followed some sort of sustainable investment criteria, according to estimates from the Global Sustainable Investment Alliance (GSIA). This is likely to increase further as awareness improves and more corporates start giving due importance to ESGs. Therefore, we believe that ESG-focused funds will continue to perform well over time.