While Indian equity markets are dancing to the tune of global events, S Naren, chief investment officer (equities), ICICI Prudential Asset Management Company, told Priya Kansara Pandya that an improvement in the domestic environment was a bigger trigger that would aid the market recovery. Edited excerpts:
How will events in the developed markets impact fund flows to India?
In the short term, everything is material for markets. But in the long term, what matters more is India’s ability to create an enabling environment for growth without inflation and too much of current account and fiscal deficits. This is the biggest challenge for the government. We have seen a remarkable reluctance by corporates to invest in the current times. They are finding it difficult to implement projects in the country.
What is your view on crude oil prices?
In addition to subdued growth of the developed economies, a slowdown in the emerging markets, especially China, will bring down crude oil prices. Also, supply from Libya, expected shortly, would help a lot. At $80 (Brent), I would be comfortable. Even if it corrects from $100, India stands to gain.
Will it happen, given the continuation of easy money policies?
The easy money policy has been there for two years (2009-11), but India’s growth has been strong. The government should make it easy for corporates to set up or step up businesses and create supply. We have experienced that in telecom (tariffs one of the lowest in the world) and power equipment (declining merchant tariffs).
How do you find the risk-reward ratio of Indian equity markets. Do you expect a further downside?
The ratio appears to be fair. The only risk appears to be crude oil, but the possibility of a spike going ahead is low because the world is slowing down.
What has been your asset allocation strategy in the last six months? What will it be in future?
As markets have corrected, equity levels have gone up. We have low cash levels — less than 10 per cent compared to the past. For funds like dynamic plan, we used to have 35 per cent cash a year back, but that has come down significantly. Markets today are much more attractive compared to three months back. Thus, asset allocation should be maintained in equity. And, exposure should be increased if crude oil corrects.
Which sectors have you churned in the last six months? Would the same strategy continue?
The low risk sectors or the defensives like consumer staple and health care are not cheap. All other sectors have become attractive from a valuation perspective. In the last six months, we have been overweight on telecom, oil and gas, metals and technology, while being underweight on capital goods due to the expected investment slowdown. We also found good risk-reward ratio in many of the interest rate-sensitive sectors, namely auto, real estate, banking and infrastructure. Going ahead, we will look at the valuation and global factors to decide whether to change our strategy.
Though there are opportunities in the infrastructure sector, there is even greater competition. Do you like the sector?
In 2007, we were told roads would get constructed and cars would not get sold. But now, people say otherwise. So, I see opportunity in infrastructure and the broad theme has to shift from consumption to infrastructure. The entire hype over the infrastructure sector seen few years back has gone. That makes the sector a safer bet than few years back.
Which sectors are likely to fare the worst in the September quarter results?
The expectation of bad performance in the September quarter has been factored into stock prices. So, I would not say they will disappoint. Interest rate sensitives will bear the brunt.
They have not seen a big jump in their top lines. On the other hand, the consumption sector (discretionary, consumer staple and health care) will do well. Overall, I think currency will be the wild card in the second quarter.
Do you see any further downgrade in earnings estimates?
The market has already got downgraded over the last quarter. So, I am not too much worried about any further downgrade in earnings.