Shahzad Madon, the executive director of ICICI Prudential Asset Management Company, and has been with the firm since 1993. Joining shortly after India began the process of liberalisation that has created so many more wealthy Indians, he now leads the organisation’s PMS (portfolio management service) business.
Madon is bullish on India’s economy, feels large-caps should be the mainstay of any portfolio, and is convinced that investment should be left to experts. He explained the reason to DNA Sachin P Mampatta drawing analogies from the Mahabharata, pickles and old Bollywood villains. Excerpts:
What is your outlook on the economy and the markets?
This has really been a disbeliever’s rally. Everybody wanted to participate but was concerned about the valuations. That is why the movements you see on the indices has been jagged. For example, there was a correction when it seemed that there could be some tightening by central banks across the world, including India. But we bounced back when those fears were allayed.
Currently, the market is poised between valuations that can neither be termed too rich to sell nor too cheap to buy. It is like that famous Ajit dialogue, about putting the hero in liquid oxygen, ‘Liquid ise jeene nahi dega, oxygen ise marney nahi dega! Perhaps here liquidity won’t let the markets fall and valuations won’t allow it to rise too much. If the market rises 10% from current levels, it could be termed as expensive. If it dips 10%, there could be some value buying. A lot has been priced into this rally very fast and there aren’t huge pockets of undervaluation.
Emerging markets are more buoyant than some developed economies like Japan, although nobody knows about the effects of a double-dip, should one occur. India and other countries have been doing well in terms of quarterly corporate numbers and GDP growth. The economy should continue to do well even if the stock market trends see a blip.
Has the rally been stronger in larger stocks compared with mid-cap scrips?
Yes, generally large-caps have tended to fall less and have risen strongly. The bulk of a person’s portfolio should be made up of large-cap stocks. When you are having a meal, you might have a fair amount of dal and a good helping of rice. But the pickle is not poured on in the same proportion. maller stocks carry more risk and, by definition, also return more. It depends on what time in the cycle you come into the market. Those who had come into the mid-cap game early, even among mutual funds, have done better in terms of returns than those who came in later.
How closely is the availability of research linked to a stock’s performance?
By the time stocks pick up a lot of coverage, they will already have run up. The less researched stock does provide more scope for giving alpha. On the flip side, if your call goes wrong, you can be caught very badly.
It then becomes an Abhimanyu stock, entry toh ho gaya, ab bahar kaise nikloge?
Ideally, unless you are doing it as a full-time job, you should not be investing by yourself. It is not a practical thing to do. You do not treat yourself if you have an illness; similarly this is a thing the average investor should leave to the
professionals.
Don’t factors such as the ‘institutional imperative’ affect returns even in the case of professional-managed funds?
The retail investor is fairly unfettered, and no fund can put 80% of its portfolio into a single stock. But this can cut both ways and one might find that memories tend to be selective when it comes to stock-picking expertise. During the bull-run, everybody might remember picking one stock that gave spectacular returns, but nobody talks of how their portfolio has adjusted to and held up to the crash that followed.
There are a lot of alternative asset classes that have come up. What advice would you give investors looking at these options?
Alternative asset classes should generally not be a very major part of the portfolio. It makes great copy to write about them, but an investor needs to look at valuation, liquidity and what regulations govern the asset class. They are largely fringe asset classes and cannot be seen as part of the mainstream. One needs to look at the size of the market and norms for pricing and valuation. Transparency is an important factor in such investments.
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