Indian equities may have delivered stellar returns this year but volatility will continue to be the order of the day, says S Naren, CIO ? equity, ICICI Prudential AMC. Naren tells FE?s Ashley Coutinho that moderating inflation, a downward interest rate bias and recovery in some areas of infrastructure construction could provide tailwind to the market in the second half. Excerpts:
The market has run up quite a bit this year. What is your advice to retail investors?
We believe that volatility will continue. Our advice to investors is to maintain their equity asset allocation and aggressively increase weightage on equity in case of triggers such as correction of crude oil prices, improvement in fiscal deficit and action on the interest rate front. The volatility can present investment opportunity and investors can benefit from investing in funds that have the potential to capitalise on volatility. SIP, STP and asset allocation should continue to form the basis of retail investment philosophy.
What are the key positives and headwinds for the market this year?
Factors like moderating inflation, a downward interest rate bias, focus on growth and eventual recovery in some areas like infrastructure and construction could provide some tailwind to the economy and to the market in the second half. The RBI will be better positioned towards a more pro-growth stance this year. The year 2012 will be more about managing growth rather than managing inflation. Increased focus on investment in infrastructure by utilising revenue received through effective taxation, disinvestment and measures to reduce the fiscal deficit will be important to sustain economic growth.
What are your expectations from the Union Budget?
Given the high fiscal scenario, it is imperative that the government takes corrective action towards fiscal prudence in this budget.
Which are the sectors you are bullish on?
We continue to be underweight on consumption-oriented sectors like FMCG due to valuation concerns. Consumption demand combined with a conservative outlook has helped FMCG companies to witness a strong upside over the last three years. The current valuation reduces the upside potential, except in the case of select stocks across the mid-cap space. Sectors such as infrastructure and banking could benefit from a benign global environment and government action on policy reforms and fiscal consolidation. We are also neutral to positive on all export sectors due to the prevailing high trade deficit in India and an improving global scenario.
What are the global cues to watch out for?
The most significant global cue will come from the movement of crude oil prices. The shift in focus of central banks across the globe towards reviving economic growth and the positive macro-economic indicators in the US like the strong GDP growth have helped ease sentiments. Initiatives like the LTRO (longer-term refinancing operations) have helped provide comfort for now. However, the crisis still lingers and the markets will continue to watch global news flow for further direction.
What is your outlook on FII inflows?
The recent surge in FII inflows is due to the LTRO in Europe. It is also because of attractive valuations of domestic companies and high bond yields in debt. In future, liquidity enhancing programmes in the Western world are likely to help emerging markets, including India. Finally, long-term FII flows are determined on the basis of the relative attractiveness of the growth prospects of different nations. If India addresses imbalances like fiscal deficit, roadblocks in project implementation and creates a prudent business environment, we will continue to garner FII flows.