When earnings don't pick up, correction is logical: S Naren

Interview with Chief Investment Officer, ICICI Prudential Mutual Fund

Indian shares are experiencing high volatility, after a 10 per cent correction from their peaks. S Naren, chief investment officer, ICICI Prudential Mutual Fund, says long-term investors needn't worry. He tells Chandan Kishore Kant there's great potential from a perspective of three to five years and the corrections can be used as an opportunity to invest. Edited excerpts:

The market’s seen a sharp correction since March. Do investors need to be worried?

No market goes up in a straight line. Given the fact that earnings did not pick up, that the correction was logical. Even in the 2002-07 bull market, there were many corrections throughout the phase, while this is only the first one in the current phase. While, we have seen high volatility over two to three months, these corrections are healthy; they ensure investors moderate their return expectations.

Also, those under-invested in equities get an opportunity in such times. We recommend investing in equities with a medium-term to long-term horizon to create reasonable wealth.

Foreign investors have turned sellers in the past month or so.

If we look at the net of stock futures, the selling by foreign institutional investors (FIIs) is not as large as is being said. That apart, there has been substantial buying of stock futures in the recent past, against the selling in cash. Hence, we do not believe FIIs have sold substantially in the recent past.

Are the markets overvalued?

With the Sensex trading at a one-year forward price to earnings multiple of 15.9 times, closer to its historic average, the markets are fairly valued at this point. The potential for India’s recovery in the long term provides a compelling case for investing now.

Is the euphoria surrounding the new government dying down?

A stable government is a structural positive for the economy. In a large democracy like India, it is important to give a reasonable span of time to the government for seeing things improve on the ground. The government has taken several positive steps — the Insurance Bill, issues regarding gas power plants or the coal auction. It is also focused towards elimination of bottlenecks in the infrastructure space. We believe India is on the path to increasing growth.

When do you expect a revival in corporate earnings?
We believe a revival of the capex cycle or the deleveraging of infrastructure and real estate sectors will support earnings growth. There doesn’t seem to be visibility on these two sectors getting deleveraged for the next three to six months. However, earnings should not worry a long-term investor, with an investment mindset of three to five years.

For the past few quarters, you and other fund managers have been buying on dips. Will this strategy continue?

The markets will always see rallies and corrections. As fund managers, particularly considering our product suite comprising of defensive equity funds like ICICI Prudential Dynamic Plan and ICICI Prudential Balanced Advantage Fund, we will continue to buy on dips.

Experts believe 2015-16 will be a highly volatile year for Indian shares. Do you agree?

The markets are likely to be volatile till the first interest rate increase in the US is digested. We continue to believe the correction is an opportunity to invest. This phase does not affect the long-term compelling case for Indian equities, with a moderated return expectation. 2015 is the year for investing in equities with a horizon of three years and more. We recommend defensive equity investing, with products in the balanced advantage and dynamic asset allocation category as suitable ways to ride the volatility.

Some sectors appear to be richly valued. How would you place your investment calls?

We believe a cyclical revival will eventually happen. So, investors should gradually invest for cyclical revival in the economy. Consequently, cyclical sectors like financial and infrastructure are likely to do well in the long term. Also, as the rupee has appreciated substantially, the information technology sector, which has been hurt by this rupee movement, is likely to benefit — we believe the rupee is not likely to continuously appreciate against the euro. Sectors like consumer (goods) appear to be richly valued but continue to deliver good returns.