The BSE Sensex surged to a record high as investors cheered the assembly election results. Clearly, the prospect of a Bharatiya Janata Party-led government at the Centre after the general elections in 2014 enthused the market. Business Today's Mahesh Nayak spoke to S. Naren, CIO, Equity and Fixed Income at ICICI Prudential Mutual Fund, on the outlook for the Indian stock market. Edited excerpts from the interview.
Q. Why is the market exuberant?
A.The market is reflecting its optimism of getting a pro-growth, anti-inflationary government post elections.
Q. As a fund manager and an investor, what would be your strategy in the current market and why?
A. Our belief is that the cyclical sectors are likely to rally in the next three years when industrial production goes up. While we are not clear on the quarter or the month in which industrial production may go up, this appears to be imminent. Thus, fully valued sectors like consumer goods (FMCG) and possibly technology and pharmaceutical are likely to underperform without possibly giving negative returns. However, we believe that over the next year volatility is going to continue due to the combination of tapering (of QE3 by the US Federal Reserve) and political risks impacting the economy. Keeping this in mind, it is important to equip oneself to use volatility advantageously.
Q. Sentiments and liquidity are the only two factors that drive markets. Do you see both continuing to keep the Indian market inching higher and why?
A. Domestic investors are extremely underinvested in equity while FIIs have been investing in the Indian markets on a sustained basis. However, with the forthcoming Fed tapering, there is a high possibility of FII funds moving out, which will lead to markets becoming volatile. However, India is a long-term structural story which will continue to drive the markets higher.
Q. Markets usually run ahead of reality, so are we still 12-18 months behind actual growth coming back into India?
A. Markets usually discount the immediate future developments whether it is upwards or downwards. While upward swings have been well documented, downward swings have also taken place. For instance, Indian equity markets started to correct from October 2010 to November 2010, which was ahead of the GDP growth data being published. Clearly, markets can be ahead of reality on both the sides.
Q. What would be the impact of a revival in the developed markets on the Indian market? Are the recent signs of revival in the developed markets a cause of concern for India and emerging markets and why?
A. There is no cause for concern about developed markets reviving. On the contrary, it will be a positive situation for Indian exports and IT and will only facilitate further growth of our economy.
Q. Rural consumption and exports were the only drivers of India's growth. Do you see these two cylinders continuing to fire? Will we have to wait for the general elections for the other two cylinders, investment and government initiatives, to fire?
A. Exports have so far not been a big driver due to low growth in the developed markets. As stated earlier, developed markets improving at this point will support our exports. Rural consumption has been good. The impact of a good monsoon is also likely to help us. However, we have to remember that rural consumption can also slow down because the benefits they have received due to high food prices will be curtailed with government measures to contain prices.
Policy paralysis has been one of the setbacks. This has resulted in slowing down of reforms and investments. A pro-reform and progressive government in power post elections will help reverse this situation. However, a situation where we have a government which is non-growth oriented will be negative.
