ICICI Pru US Bluechip Equity: Business Line

 

After a lull, there is once again a new fund offer (NFO) that will do international investing, this time focussed on blue chip stocks in the US.

ICICI Pru US Bluechip Equity (ICICI US Bluechip) will invest in stocks from the NYSE and the tech-heavy NASDAQ. The fund’s benchmark will be S&P 500. There are many positive aspects about the investment idea in the present uncertain macroeconomic situation.

Unemployment rates are coming down in the US and the number of jobless claims too is reducing. The HSBC Markit Purchasing Manager’s index is hovering above 50, indicating reasonable business confidence in production. There are some growth challenges, though.

On the other hand, the European region is affected by debt crisis and considerable economic slowdown. Emerging markets such as China too have cooled off a little bit and India is facing a combination of slower GDP, high inflation and policy paralysis on key reforms. This makes investing in the US a more desirable option for the foreseeable future.

On a more micro level, corporate America is now in a much better position than in 2008, with a strong cash position. Growth rates, especially of technology companies, have been spectacular over the past 3-4 years.

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WIDER OPTIONS

ICICI US Bluechip will invest in stocks listed on the NYSE and NASDAQ.

This gives the fund an opportunity to take exposure to sectors such as defence, aerospace, semiconductors, a variety of manufacturing companies and also the entire gamut of technology players as well as Internet/e-commerce stocks.

Apple, Google, Intel, Microsoft, Cisco, eBay, Qualcomm and Yahoo! are some of the companies in the technology space that can be invested in. From the NYSE basket there are options such as GE, Cummins, Boeing, WalMart, a whole host of global financial giants. The sheer variety, breadth and depth of companies available in the US is definitely not present in India, where companies within a sector tend to be homogenous in their ambit of operations.

VALUATION CALL

According to Bloomberg estimates, the price-earnings multiple of S&P 500 for FY13 is likely to be around 11 times. Earnings growth projection is more than 12 per cent, with individual sectors likely to clock a much higher growth.

Technology companies, especially software and hardware giants, smartphone manufacturers and consumer staples are expected to deliver much stronger revenue and earnings growth. The dividend yield of American companies too is much higher than their Indian counterparts. In contrast, Indian indices such as the Sensex or Nifty are trading at forward multiples of 14-15 times.

The earnings picture is a bit muddled as interest rates, slow pace of project execution and higher inflation may stall earnings expansion.

Thus for the immediate future, the US may be a relatively better investment option.

RISKS

Indian fund houses investing overseas have generally tended to give a lackadaisical performance.

Their returns have been perked up in the past when the rupee has depreciated. This means that stock or sector selection may have not been optimal.

Two, a sound revival in the Indian economy and therefore companies, when it does happen, can see stocks rallying very sharply. In such a scenario, domestic mutual funds are likely to generate far higher than the average 9 per cent annual returns delivered by diversified equity funds in the last three years.Prolonged periods of underperformance in stocks could well be made up in a rally lasting for a short period. Hence, investors neglecting the Indian markets may also face an opportunity loss.

Currency is a bit of risk too with international funds. If the rupee starts strengthening, it would affect returns.

ICICI US Bluechip will take the assistance of Morningstar in stock selection by tapping into the latter’s expertise.

The fund can at best be a diversifier where small portions of an investor’s portfolio can be parked. For tax purposes though, the fund will be treated as a debt fund.