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ESG best bet for volatile times: S Naren


We believe there is a need to maintain fairness, to follow advantage allegations and also have a certain position in gold, says that the Executive Director & Chief Investment Officer, ICICI Prudential AMC. What is your present market view?It is not a very easy area in the point of view of the equity market as you’re discussing roughly 45 days ahead of US elections. There’s been a big melt in US FAANG stocks and following that, FAANG stocks have noticed a meaningful correction in yesteryear. I would still say that even after the US FAANG correction, even a lot of the US stocks continue to be meaningfully overvalued. So we are headed for a period of volatility globally. In India, we have a two kind marketplace. There is one set of stocks which keep going up frequently. Another set of stocks keep going down frequently. So it’s a very funny situation in which you do not know exactly what to say regarding the markets since on one hand, daily, the cost to earnings, dividend yield, price to book, seems thinner and cheaper by the day and also yet another set of stocks where everything seems costlier daily. And will that diverge, will that converge? Within the 30 years that I have been in the markets I have observed that one day they suddenly converge but there were periods of such as 1998-1999, 2006-2007 in which those divergences have lasted for some period of time only to eventually converge. So that’s an arduous job. The fantastic thing is we’ve observed everyone make cash, especially retail investors, who entered the market in April. It appears everyone has made cash in equity markets and large, except for the people who follow valuation models such as cost to earnings, price to book, dividend return. Anyone who doesn’t comply with any valuation model has really made cash. And generally speaking, people also have made money because everyone buys a basket of items and in that basket of items something functions. I would say it is not very easy to say what is the industry perspective. How are you investing in this market? You have a compulsion of risk management, you can’t purchase more than 10% of a stock such as Reliance. On the flip side, you have a standard to beat. How are you currently managing your portfolios?Every international investment expert states that you have to take pain. We are currently in the process of taking pain because eventually in the very long run, the markets are fair and you can’t have a scenario where only tech and pharma stocks continue up and that cannot occur at a time when deposit rates keep going down. Liquid and instantly funds provide you only 3 percent yield. Why should stocks which give you 7 percent and 8% dividend return keep going down daily? I don’t really believe that’s also plausible. Finally markets will likely probably be rational, that’s exactly what investment gurus like Benjamin Graham have to say. On the flip side, John Maynard Keynes explained that markets can stay irrational and for long until you’re insolvent and that’s another matter. Chuck Prince has stated you have to keep dancing while the markets are irrational. So you’ve got several investment gurus making very great statements and that’s a challenge you have to keep rational because mutual funds will be long-term investment vehicles. For instance, there were periods of irrationality in 2017-2018 when folks explained that mattered was return to maturity and risk did not matter. Suddenly in the 2018-2020 period, risk performed and stocks with greater the yield to maturity got into trouble. Today we have a scenario that greater PE, greater cost to book — nothing appears to matter in many of the stocks. We will go through those phases. Should you take a look at something entirely outside our domain, then a stock like Apple corrected from $135 to $108 in no time. We’ve got a project of looking after investors in the very long run. Therefore, if you take a look at investments at a point to point basis, there is a problem. If we’ve looked at investors in 2007 December, there were strategies of ICICI Prudential which were not doing well. It was those very schemes which when we had looked in 2009 December, had started doing nicely. So if we had looked at it about 31st December 2007, you would have believed that they were rather bad strategies and if you’d considered 31st December 2007 the strategies which were performing extremely well. Many of them did not succeed on 31st December 2009. Finally at the end of the afternoon, I try to find a mutual fund, I do not work for a hedge fund and my aim is to care for the shareholders of India in the very long run, not look at it onto a point to point basis. So I have to respect long term investment methods and short-term investment methods. At exactly the same time, I have to bear in mind that the world is shifting. How do I consider home in a world that’s changing? For instance, in the past six months, we’ve been working out of home. We are much more reliant on technology to receive our work done. So there are a lot of other things which we have to keep thinking about because we are not in a continuous world where all is the same. We are in a dynamic world and we have to keep thinking about that too at exactly the same time. So while we have to think about investment methods which have been there for a very long period of time, we have to think about a changed world too. When I see stocks such as Snowflake and Lemonade and DocuSign and Nikola and Tesla, it’s actually interesting to watch what is happening in the world. At exactly the same time, I have observed such periods of irrationality and may be exactly what the world requires rationality in 2007 and 1999. So, there are occasions when a lot of items have changed dramatically only to converge. It’s a very intriguing time and obviously it gives me sleepless nights. It gives me a lot of time to believe and I have to keep thinking whether I am wrong, find where do I have to modify and what exactly do I have to do. I have to keep thinking about these items. With all due regard to all global gurus, their own perspectives are also changing. Buffett has completed things which he hasn’t advocated previously which is buying technology businesses, investing in IPOs. Howard Marks has shifted in past six months in terms of his market perspective and assessment of the cycle. The reality is that we are in a manufactured world central bank bull industry. We are in a zero percent interest rate environment and in such an environment, a lot of things have become very interesting from the western world. When the Fed Chair comes and tells you to the subsequent 3 years I am likely to maintain interest rates at zero, then there are particular things which become very different from what it’s before. The world is also adjusting itself to some grown world central bank bull market and also in India we’ve seen among the cheapest interest rates on short term rates. We believe there is a need to maintain fairness, to follow asset allegations and have any position in stone. We think there is a need to commit a specific quantity of money in global markets and we believe that it is not sensible to say now is your day to earn your equity . These are what we learnt out of continued discussions on what is the designed world central bank bull market means because while you may have a US presidential election, designed world central banks do not have to deal with elections, they do not have to go through a scenario in which I persist to get a few months, my money will be taken off. So, these kinds of things do not occur and that’s the reason the reason we went through a lot of discussion to arrive at those perspectives. Global gurus are also learning that no interest rate with very low credit spreads is something which they also have seen in such an intense manner for the very first time so you’ve got to likewise give them and you’ve got to also keep in mind that many of these investments such as Warren Buffett in Apple were not made just now. Majority of this had been made much sooner and should you choose an investment such as Snowflake, I do not believe Warren Buffett produced it at $200. He made it at a different price point. So you have to also recall what is the cost where they have been and what is the cost where the market is now pricing items. One thing about investing is everyone makes mistakes and this is not arithmetic. I keep telling everyone that this is not arithmetic and this is a continuous learning firm and we have to keep learning and we have to keep thinking and we have to keep aligning our understanding. But at exactly the same moment, there are particular core investing methods which we have to keep remembering and that entails a focus on cash flow and inherent value which needs to be kept in mind at all points of time. Should you take a look at the credit score fiasco which occurred, it had been predicated on the fact that a number of the easy logics that had to be maintained in mind obtained forgotten. When you overlook center investing methods , they will abruptly play and they’ve played in the past, they’ve played in 2008, they’ve played in 2000 and they can again play now. I believe the objective of the mutual finance fund manager or a CIO is to be disciplined because we are not considering point to time, we are searching for the very long run and we have large quantities of cash where we have to care for investor attention in the very long run and that is why we wisely decided that we have to care for through an asset allocation framework as opposed to just a pure equity framework because pure equity extends through the problems of February-March where abruptly out of the blue, you lose 20 percent of clients returns and whereas in an asset allocation framework, the losses that investors suffer are much much lower and therefore we provide a lot greater investor expertise in an asset allocation framework. That’s what we have tried to do with all of our clients in our country through our goods. What exactly are you expecting given that the Nifty 100 ESG indicator has now completely recovered? Speak with us a little bit more about the thought behind this?ESG is a very powerful investment framework that got generated over a time mostly by European shareholders and awarded that the surroundings, governance and social factors play a huge part. You have to consider that for equities as a course, we receive the residual returns following what is due to employees, after what is because of the bond holders, even after what is because of the authorities. It’s the residual returns which go to the equity holders. We think that the ESG framework is something which assists the equity holders. The Europeans have given a lot of thrust to this and they’ve realised that it actually gives an excellent long-term investment platform for long-term investors because at the close of the day, should you care for the environment, the societal variables and governance variables, you’re automatically going to look after the remaining onus of minority investors and therefore the minority investors are going to gain very significantly in the very long run. That’s how we’ve come up with this and this really is a class that’s going to gain traction over the upcoming few decades. It’s something which we believe provides a fantastic opportunity to raise cash and the timing of the launch has been mainly since the markets have regained. But we believed that given that in the month or so following the launch we would have enormous volatility possible due to the US elections. The deployment interval would be when you may have massive volatility. It’s a very good long-term investment framework and people have to think long term in this class. We’ve been asking a great deal of our specialists their mantras on becoming wealthy. At a time like this, we have to keep in mind some good investment strategies. What would be your advice to investors?You have to remember that equity shareholders are remaining risk beneficiaries. That’s the reason we believe ESG is the ideal way to undergo times of volatility. March was among the best times to invest because there was so much volatility. We always think volatility is among the best times to invest and we invest a good deal of time looking at governance variables, environmental and social variables and this is an area where we keep learning. I believe the market itself is not in a very easy frame of investing at this time period but at exactly the same time, there are areas where lots of long-term investment opportunities are there at this time period and there are areas which look fully valued now. We like the way both institutional and retail tasks have been both involved unlike in the last ten years when it was only institutions who were busy and not retail. So is something which I enjoy at this time period.

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