Equity Valuation: Wondering if you should keep buying stocks? Readings from S Naren’s valuation model can help

NEW DELHI: With valuations in the domestic stock market looking much more reasonable during the ongoing corrective phase, which many experts describe as signs of an impending bear market, India’s top value investor S Naren is busy buying stocks. Based on an in-house valuation model at Mutual Fund, where he is the chief investment officer, the fund manager has hiked allocation to equity in his popular Asset Allocator Fund.

“The Equity Valuation Index indicates that overall market valuations have moderated from their recent peak amidst rising global uncertainty. In line with our asset allocation model, we have increased equity exposure in our asset allocator fund to 33 per cent as on 31st May 2022 as compared to 19.8 per cent on 31 Jan 2022,” Naren told ETMarkets in an interview.

The valuation model exhibits the principles of buy low, sell high by increasing equity exposures when markets have fallen and vice-versa.

In the last one-year period, Sensex and Nifty have gained marginally with several stocks with robust fundamentals hitting 52-week lows despite a strong FY22 in terms of earnings.

With assets under management of nearly Rs 16,000 crore, ICICI Prudential Asset Allocator Fund (FoF) has consistently managed to outperform the index in one-year, two-year and five-year timeframes. In the short run, the mutual fund has managed to protect the downside as compared to Nifty.

“The allocation/rebalancing among equity and debt mutual fund schemes is based on an in-house valuation model. Apart from the model, we also consider opportunities that are available in the debt market. Here, the scheme has the flexibility to allocate 0-100 per cent to equity or debt depending on the valuation model,” said Naren, who has an impressive track record of three decades on Dalal Street.

As on 31 May, the allocation to equity, debt and gold stood at 33 per cent, 56 per cent and 11 per cent, respectively.

“As a part of the asset allocation process and based on our in-house equity valuation model, we are steadily increasing our equity allocation across our asset allocation schemes,” he said.

Fears of recession and interest rate hikes are giving sleepless nights to traders. Although the Nifty has bounced back by around 5 per cent after hitting a 52-week low of 15,183.40 on June 17, the outlook doesn’t seem bullish at this stage.

“The bull market we had seen over the last two years was largely due to the monetary policy measures initiated by global central banks. Currently, we are in the midst of an interest rate hike cycle (driven by global central banks) which could lead to lower global economic growth and as such equity markets are expected to remain volatile,” the money manager said, adding that the near term outlook looks uncertain and volatile because of the US rate tightening.

Manufacturing is one sector where Naren is bullish on for the next decade. “Domestic cyclicals like banks, auto, infra, cement, capital goods could lead the next rally in our view. Rupee depreciation will also support export oriented sectors like IT and pharma,” he said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)