Correction is a chance to allocate more to equities: S Naren

Interview with Chief investment officer, ICICI Prudential AMC

The Indian markets have tumbled nearly 22 per cent from their peak levels, due to many issues, global and domestic. S Naren, chief investment officer, ICICI Prudential AMC, talks to Puneet Wadhwa on this. He feels India remains an attractive destination and the recent sell-off has made valuations attractive in the large-cap space. Edited excerpts:

What is your analysis of how global equity markets have played out in calendar year 2016? Do you see more pain ahead for the global financial markets? What about India?

Indian equity markets corrected in the first month of 2016, mirroring global sentiment on oil prices and developments in China. Currently, the markets are valued at close to the long-term average price to earnings multiple and we feel a slow and gradual upswing would make it a compounding market over the next three to five years.

We believe a correction due to these non-fundamental reasons is an opportunity for investors to allocate towards equities. At a 7.3 per cent growth rate, India is still among the fastest growing economies in the world, so there’s no cause for alarm.

Do you expect calendar year 2016 (CY16) to see increased volatility on account of global factors?

The markets might see some volatility next year, driven by news, both external and domestic. A strategy in 2016 would be to invest from a medium to long term perspective, conservatively in balanced advantage and dynamic asset allocation funds. Such funds allow buying low and selling high, while keeping human emotions aside, as they are structured to invest in equities when the markets are cheap and to book profits when the markets are rising.

Which sectors/themes make it to your investment list?

The recent selling by foreign institutional investors (FIIs) from Indian markets has led to attractive valuations in the large-cap space in absolute terms and relative to the mid-cap space.

Do you see more allocation to emerging markets (EMs), especially India, by FIIs in calendar year 2016? Why?

Till (the price of) crude oil rallies or the US Federal Reserve eases its monetary policy, we are unlikely to see any significant allocations to EMs from FIIs.  Most EM portfolios have been overweight on India. FIIs' selling has been prominent also because the bulk of the money has come through EMs. So, any redemption in EM funds have automatically led to redemptions in India, irrespective of the current positive view on this country. However, India is a relatively attractive country in the way FIIs look at EMs.

What are your expectations from the Union Budget 2016?

From the second full-year budget of the government, we expect a slew of reforms on taxation, development and economic growth. The government could make all efforts to reduce revenue deficits through better tax implementation policies and increase fiscal deficit and boost non-plan expenditure.

The government could increase expenditure on projects like small bridges, rural roads, public transportation and health care that have a lower execution time. This could result in faster recovery of the economy. Also an increase the capital outlay for recapitalisation of banks and necessary steps could energize the banking system.

After two consecutive monsoon failures, the rural economy could be revitalised with some incentives like creation of new roads, irrigation and infrastructure projects, and thereby improving the wellbeing of the rural population.

In the last 25 years, the government has incentivised investment in capital expenditure as a tool to boost economies. The government could now also look at stimulating employment generation through some innovative policies aimed at shoring up production.

How will the markets react to any deviation (by the government) from the fiscal deficit target?

As Indian companies are unable to invest in new capital expenditure due to slowing economic growth, this mantle now rests with the government to keep domestic engines running. While the market could initially be impacted by the increase in fiscal deficit, in the long run, we believe it is a positive step if the government decides on a higher fiscal deficit target, while simultaneously cutting the revenue deficit substantially.

Are the markets factoring in the possibility of higher inflation in 2016?

We are not worried about inflation in 2016. It might be a cause of concern if there is a third successive weak monsoon, which we hope does not happen.

What are your views regarding the beaten-down sectors like banking, metals? Are they worth a look as a contrarian bet?

While there is likely to be some volatility through the year in the banking sector, it is likely to bottom out this year because NPL (non-performing loans) concerns have risen significantly. The same holds good for the metals sector; here, however, it is important to select companies with a reasonably good balance sheet, as there are a lot of stressed companies in this sector.

Your key takeaways from the December quarter results of India Inc?

Indian earnings recovery has not taken place because the lower prices led commodity companies into a downturn. However, these also drove an increase in consumption. Globally, the challenges are not yet fully behind us.

Hence, it is not likely that we see any exceptional earnings recovery, particularly in the first half of 2016. On the contrary, earnings growth has already been downgraded by analysts this past year. Next year, earnings growth could be driven by consumption sectors.