Market Correction Inevitable? | How ICICI Prudential's Anand Shah Sees The Stock Market

Summary

Anand Sha, head of PMS and AIF Investments, discusses the current state of the markets, advising a cautious approach given the reduction in market inefficiencies and potential corrections. He highlights the importance of diversification and asset allocation, noting that while market corrections are healthy, waiting for them may cause missed opportunities. Anand also emphasizes bottom-up investment strategies, particularly in sectors like manufacturing and services. While optimistic about some PSU stocks, he remains cautious about overvaluation in certain areas. Overall, the conversation revolves around preparing for potential corrections while staying strategically invested.

Takeaways

• 📉 Expectations from the market should be muted compared to recent years due to reduced inefficiencies.
• 💼 The decade-long dominance of consumer-facing businesses is now balanced by the rise of manufacturing and allied sectors.
• ⚠️ Market inefficiencies have reduced, making it harder to achieve high incremental returns.
• 🔍 Retail investors are more confident now, leading to increased caution from market participants and regulators.
• 📊 Market corrections are healthy and necessary for long-term stability, but deep corrections (10-20%) have been absent since 2020.
• 💡 Asset allocation is crucial; waiting solely for corrections can lead to missed opportunities.
• 🏦 Manufacturing, banking, and utilities sectors are showing promise, while consumer product businesses are overvalued.
• 🔄 Market has been correcting internally, with many stocks down over 10% despite broader indices hitting new highs.
• 🧠 The shift from product consumption to services is a key trend globally, influencing investment strategies.
• 🔎 IT sector remains fundamentally strong but lacks attractive valuation due to limited growth opportunities.

Q & A

What does Anand Sha mean by 'muted expectations' from the market?

Anand Sha suggests that the market returns will be lower compared to the past few years. He explains that in 2020, markets were starting from a low point after five years of subdued growth, which created opportunities for high returns. Now, the market is sitting on significant profits, reducing the potential for large gains going forward.

Why does Anand Sha believe inefficiencies in the market have reduced?

He explains that in the past, consumer-facing businesses were overvalued with high price-to-earnings (P/E) and price-to-book (P/B) multiples, while manufacturing businesses were relatively cheap. This gap has narrowed, making the market more efficient and reducing opportunities for large profits.

What impact does Anand Sha think the increased retail participation and SEBI’s new regulations will have on the market?

He sees the increased retail participation and SEBI’s regulations as positive developments. Retail investors have become more confident, and regulators are taking steps to curb risky behavior. He believes this cautious sentiment makes the market healthier and that a correction would be beneficial.

What is Anand Sha's view on market corrections and their timing?

Anand Sha notes that markets used to correct by more than 20% every 13-14 months and by 10% one to three times a year. He believes such corrections are essential for market health, but since 2020, there hasn't been a deep correction. He suggests waiting for a 10-20% correction before making significant market commitments.

Does Anand Sha recommend waiting for a correction before investing?

No, Anand Sha advises against waiting for market corrections. He stresses the importance of maintaining a proper asset allocation instead of holding all cash. Market corrections might not happen immediately, so it's important to stay invested but remain cautious.

Which sectors does Anand Sha find attractive for investment right now?

He likes the manufacturing sector, especially manufacturing-allied businesses like capital goods and power utilities. He also finds opportunities in consumer services, particularly in travel, education, and premiumized consumption patterns, which are benefiting from the shift in spending as per capita income grows.

What is Anand Sha’s outlook on the IT sector?

Anand Sha has been underweight on the IT sector for a while. He notes that while IT companies are strong, with solid cash flows and balance sheets, their growth rates have slowed, and their valuations remain high. He sees the IT sector as more of a slow to medium growth industry moving forward.

Does Anand Sha prefer a concentrated portfolio in the current market environment?

Anand Sha emphasizes that concentration isn't necessarily the key. It's more important to invest in businesses that are well-understood with trusted management and appropriate valuations. While some stocks may have become expensive, leading to more concentration in the portfolio, he advises against concentrating too much without thorough research.

What is Anand Sha’s perspective on the PSU run-up?

He acknowledges that the correction in PSU stocks has been significant and that some have entered buy zones. However, he is selective, evaluating each PSU stock individually rather than making a blanket recommendation for the sector. His focus is on bottom-up research to find good opportunities.

How does Anand Sha view the market’s current internal correction?

Anand Sha points out that despite the market touching new highs, there is an internal correction underway. Many stocks in the broader market are down by over 10%, with some down by more than 30%. He notes that sectors like PSU banks have peaked months ago, showing that corrections are happening beneath the surface.