‘Markets are at fair valuation zone'

Containing fiscal deficit, especially through reduction in diesel subsidies, would be the trigger for equity markets, says Mr Sankaran Naren, Chief Investment Officer – Equity, ICICI Prudential AMC.

In a conversation with Business Line , he shares his views on the current market scenario. Excerpts:

What do you make of the recent ratings downgrade? Even though interest rates have been cut, it has not triggered any rallies so far. Why?

The problem in India is high fiscal deficit. It is mainly because of subsidy, especially on diesel and other commodities. Current account deficit is also high because of this.

We cannot then have a low interest rate regime. We want fiscal consolidation.

Rate cuts cannot bring down the interest rates in the economy, if the savings are not high. Savings will be high the moment we increase fuel price.

Diesel consumption growth in India is the highest in the world.

If you want a virtuous cycle to be created, you should have diesel price hike, which will reduce consumption, thereby reducing our petroleum imports, and that causes a situation where savings go up and interest rates comes down. That will help release more resources for infrastructure.

ICICI Pru Discovery has performed extremely well over the last few years. Has it been that diversification helped or was it all a value play?

There was a perception that value funds cannot do well in a growth market. We never believed in that principle. Over the last seven years, we have seen that value investing works even in a growth market.

Value investing works if you do not focus on very few parameters such as price to book ratio (P/B) or price earnings multiple (PE).

Those value funds that focussed only on P/B or PE did not do well in 2008 globally. We are very careful about not having concentration on any particular sector. Value investing always works in the long run.

Why do you have very limited exposure to individual stocks in this fund?

If you have a Rs 1,800-crore fund and if you have mid-cap exposure that is high, then the liquidity constraint on individual stocks will be pretty high.

We cannot have high large-cap exposure in a mid-cap fund.

There has been significant increase in exposure to defensives in recent times...

We have high exposure to pharma as a defensive. In any market, the defensive sectors are consumer staples and healthcare as they satisfy basic human needs.

Even if the weight is high, the risks associated with these sectors are less.

Will moving to large caps from mid caps in the current volatile markets help?

Value investing opportunities do exist in large caps as well.

In the mid-caps, on the other hand, we have a huge variety of stocks. We can always pick good quality stocks.

How far do you think will the perceived policy paralysis affect inflows? Is the correction in markets likely to continue?

Our view is that the key issues today are fiscal deficit and current account deficit. The day those numbers improve, the markets will rally.

There was an increase in excise duty and service tax in the Budget, which is very positive.

But we also need to fix the oil subsidies issue so that the deficit in the above accounts can be brought down.

Unfortunately the bond market believed that reducing the interest rate will help everything.

It will not help equity markets until the deficit issues are resolved.

Last year, you were still bullish on infrastructure? Do you still continue to have that sentiment?

We thought that there would be a shift from consumption to infrastructure. But that shift never happened.

The belief that infrastructure would do well is conditional on consumption coming down and resources being available for infrastructure.

Will the FMCG sector continue to outperform?

Sectors such as FMCG are not cheap today. But it is not affected by macro issues such as deficits and will continue to outperform. Consumption theme has to moderate, but it has not happened for the past two years.

Do you think market valuations are attractive now?

We are at fair value zone and are not cheap.

But we are seeing pockets in large-cap stocks that are attractive. There are a few that are costly.

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