Interview with Chintan Haria, Principal - Investment Strategy at ICICI Prudential AMC

As Indian industries grow propelled by government efforts and the current economic upcycle, the oil & gas and metal sector will see a corresponding increase in demand and investments, benefitting investors in the long run, states Chintan Haria, Principal - Investment Strategy at ICICI Prudential AMC.

Budget 2024 had an underlying theme of Viksit Bharat. Which sectors according to you appear to be promising in line with the same in the long run?
Viksit Bharat or Developed India by 2047 is envisaged on sustained efforts in 9 areas including manufacturing, urban development, energy security and infrastructure. This bodes well for the oil & gas and metals sector which are critical raw materials for most industries. As Indian industries grow propelled by government efforts and the current economic upcycle, the oil & gas and metal sector will see a corresponding increase in demand and investments, benefitting investors in the long run.

ICICI Prudential is seen as a pioneer in the recently launched oil & gas ETF and the ongoing metal ETF. What are the potentials of these sectors in line with the government policies?
The oil & gas and metal sectors are considered strategically important given the crucial role they play in the Indian economic engine. Strong Government support in the form of Production Linked Incentive schemes for domestic production, reduction in custom duty of critical raw materials, and allowing 100 per cent FDI is aiding these sectors.

The markets are at their all-time high and investors predominantly look for sectors that are a value buy. Please explain the value potential in these sectors.
Despite the Nifty Oil & Gas TRI outperforming the Nifty 500 TRI 6 times in the last 10 years, it is currently undervalued compared to the broader market. The Nifty Oil & Gas Index Trailing Price-to-Earnings ratio (PE) is at 9.7x compared to the Nifty 500 Index Trailing PE at 26x.

Also, Oil and Gas Market cap exposure is lower in the broader market indices compared to their profit pool. The share of Oil and Gas as per Market Cap in Nifty 500 as of June 25, 2024, is 8 per cent. Whereas, their share as per Profit in Nifty 500 as of March 31, 2024, is 17 per cent. This difference suggests the potential rise in the market share of Oil and Gas companies to adequately represent their share in the profit pool. This makes now an opportune time to invest in this sector.

Similarly, the Nifty Metal Index Trailing Price-to-Book ratio (PB) is at 2.84x compared to the Nifty 500 Index Trailing PB at 4.47x as of June 2024, suggesting reasonable valuations.

Why ETFs are the best route to take exposure to these sectors of Oil & Gas and Metal. What are the current opportunities available?
Diversified funds typically have limited exposure to Oil & Gas and Metals, focusing primarily on larger, well-established companies.

ETFs offer broader participation across a wider range of Oil & Gas and Metals stocks. These ETFs provide greater transparency and more direct exposure to these segments in investors' portfolios, as the portfolio methodology for their benchmark indices of the ETFs is pre-decided.

What should be the ideal constitution of these ETFs in a portfolio? What are the expense costs associated with it?
Exposure to an ETF of a particular sector could ideally be limited to 5 per cent of an investor’s portfolio to balance out the benefits of concentrated tactical bets based on the outlook of a sector, and adequate diversification to limit sector-specific downside risks.

In light of recent geopolitical developments, what impact do you foresee on the sectors targeted by your AMC? How are you preparing to navigate these changes?
There is a lot of uncertainty on the global front. Ongoing conflicts in various regions continue to threaten global supply chains. Additionally, upcoming elections in a major economic power will also have widespread consequences for global trade and policy.

Slowdown in China too is weighing on markets. But on the domestic front, with policy continuity and stable macros, India finds itself in an economic upcycle. As such, we can expect some uncertainty in externally-focused sectors and more stability in businesses set to benefit from the Indian economic momentum. A diversified strategy with a focus on valuations should help to navigate the dynamic environment.

How do you see the role of technology/digital platforms in expanding the reach of investment products to a broader audience?
With rising smartphone penetration and increasing use of digital payment systems in India in recent years, technology has not only increased awareness about financial investment avenues beyond traditional bank fixed deposits, but it has also made investing in these products more accessible and convenient with just a few clicks. The rising number of Demat accounts and Mutual fund SIP folios post the pandemic are indicative of this trend. Going forward, technology is expected to further enable financial literacy and financial inclusion of the Indian masses.

What advice would you give to new investors who are just beginning to explore the world of mutual funds?
They could start a Systematic Investment Plan which lets them invest smaller amounts at regular intervals and avoid timing the market. Finally, they should have a long-term view and be patient. Instead of investing directly in stocks, they can invest in ETFs, index funds, and hybrid mutual funds. 

Disclaimer: The opinions expressed above are personal and may not reflect the views of Dalal Street Investment Journal.