Sankaran Naren’s contrarian move to stay away from infrastructure stocks during the go-go days of 2007, except in thematic funds, has been amply vindicated over the subsequent five years. The 46-year-old chief investment officer at ICICI Prudential believes the sector is paying for its excesses and that the worst is far from over. A value investing practitioner and a connoisseur of carnatic music, Naren tells V Keshavdev that in these lean times only solvent companies will live to see another day. An added word of caution: investors need to gird up their loins as we are headed into an exceedingly volatile 2014.
What drives outperformance, especially in the kind of disruptive environment seen over the past five years?
Whenever we raise a toast to outperformers, we tend to forget the role of [business] cycles. Companies become outperformers because of the sector becoming an outperformer. That part is forgotten by people very often. In the 1990s, we were in an export cycle. After that, there was a very strong boom in technology. Between 2001 and 2003, there was a lull phase and then from 2003 to 2006, there was a mid-cap cycle, followed by an infrastructure cycle that went on till 2008. Post that we had a consumption rally. The discretionary part of the consumption cycle — that is, automobiles — has deflated and the non-discretionary part is showing signs of slowing down. Now, we are entering an export and import-substitution cycle, similar to what happened in the 1990s, given the high current account deficit. Once this plays out, we will need an infrastructure cycle to prop up the economy and markets.
The problem is that when you’re in an upcycle, investors get swayed into believing that cycles last forever. That is never the case. But sectors can make a comeback. After the technology boom of the 1990s, the sector went into cold storage till 2007. But now, over the past one year, technology is back in vogue. So, as renowned value investor Howard Marks of Oaktree Capital says, if you are able to get the cycle right, many things starting working in your favour.
Knowing the all-important role of cycles, how do you pick stocks — would you just go with sectoral bets or can bottom-up stock picking work, too?