ICICI Prudential Business Cycles Fund has delivered a handsome 22% CAGR over last 3 years (vs 15% by BSE500TRI).
Anish says betting on cyclical recovery through overweight positions in industrials, auto and cement have helped drive performance. Equally, staying completely out or significantly underweight in underperforming sectors including FMCG, IT for a long while, metals etc have also contributed to outperformance.
Unlike most fund managers who are now bullish on domestic consumption, Anish is bullish on domestic cyclicals. He takes us through his thinking on the Indian economy and some global context to explain his rather contrarian stance.
Indian economy is in good shape – supply side is strong, macros are strong, corporate balance sheets are strong. Only weakness is demand is soft – which is why earnings are soft. Fiscal and monetary measures have been put in place to spur demand.
Anish reiterates his guru mantra to check the pulse of the economy: as long as home building activity remains strong in the economy(not just India, this applies to all economies), there is not much to worry about. Weakness in home building directly and significantly weakens GDP growth.
He continues to stay away from staples companies. They didn’t really see demand collapsing – their issue is many of them have got used to earning super normal profits, have been underinvesting and are becoming less competitive.
When cost of staples reduces through GST cuts, you don’t consume more of staples – you use the savings to buy discretionaries.
Similarly, the combination of fiscal and monetary stimulus measures is not just going to increase consumption – they will likely spur investment through higher demand for new homes as EMIs get more affordable and savings increase.
Increasing discretionary consumption and increasing demand for homes will spur capacity creation – hence his preference for domestic cyclicals over domestic consumption.
Within domestic cyclicals, he is most optimistic about industrials and capital goods which will be second order beneficiaries but are being ignored by the market.
Cement and autos – direct beneficiaries of stimulus measures – have already had good runs – much of the upside is already in the price.
The other big direct beneficiary is financials – Anish cautions that one has to be very careful about exposure of each lender to unsecured lending – an area of big concern for him, which he believes market is being too optimistic about.
While India is in reasonably good shape, US has worries mounting – increasing long term bond yields and weakening currency amidst increasing global concerns about the wisdom of parking large portions of forex reserves in US treasuries are all pointers to trouble ahead.
Anish is not excited about metals and the overall commodities space as China – which accounts for 50% of world demand – is gradually slowing down its infra build out. Markets look at delta – which is not going to be positive for a lot of metals.
Market will be driven by earnings growth and not multiple expansion – so don’t come into the market with a 1 year view. Come in with a3 yr view and stick with large caps.
Mid and small caps remain areas of significant concern. Many weak business models are being valued as gems. Promoters and PE investors cashing out is a tell tale sign.