As ICICI Prudential AMC launches another new fund, its CIO, S Naren, speaks on the difference between the current and previous themes betting on domestic economic revival. He also shares his views on the markets and suggests some contrarian moves in an interview with BusinessLine .

Why have you come up with yet another close-ended fund (India Recovery)?

If you take 2007, money came but there was no inflow in 2008. So it is a theoretical construct to believe that in an open-ended fund, money will come when markets are at the bottom and will go out at the top. If you look at our close-ended schemes during 2004-08, the experience was bad because we offered a window to exit every three months. Luckily, of course, I did not manage any of those close-ended funds, but only open-ended ones. In this fund, we have kept a pure dividend option. There is no growth option. At the end of 3.5 years, the money will be returned to investors.

The fiscal and monetary sides are being fixed slowly. But corporate earnings continue to be weak. When do you see earnings improve?

It will definitely take some time. This is why we like a close-ended fund. So we are fairly bullish over the next three years, when we see a good pick-up in economic growth as well as in corporate earnings.

Most segments have run up ahead of fundamentals. Are there any pockets of value at all?

The pockets of value exist in three segments — metals and materials, oil & gas and infrastructure. Of course, in infrastructure, the larger, stronger players are not cheap. The smaller, weaker ones are.

Have not most infra stocks already had a massive rally?

Today, one defence manufacturer is sought after by all the prominent groups. In another case a wind turbine company has found strong support from a pharmaceutical company’s promoter. I believe, like this, some of the major issues with many infrastructure companies will get resolved. Maybe not overnight, but definitely over the next three years we see most issues being sorted out on the debt front.

Will there not be a portfolio overlap between your India Recovery fund and your earlier growth series (1-6) NFOs? Those schemes too looked to bet on economic revival early in 2014.

The difference between then and now is that we now have clarity (post-Budget) on what the Government is going to do and how it is looking to carry forward the reform process. This time around, infrastructure-oriented growth looks possible. We may also have rural consumption as a way to play the recovery cycle. It is not doing well now. But it may play out well over the next few years and presents an opportunity to invest.

The difference in allocation would be that we will have very little exposure to sectors such as banking and may be minute or no exposure to IT and pharma. Today, across funds, these sectors account for 40 per cent of portfolios. So that, in itself, is a big difference.

Are you looking to bet on the Make in India theme?

We have to look at it carefully. There was nothing in the Budget on this. Then there is the currency factor. The Indian rupee has appreciated against all major currencies barring the dollar, so that means ‘Make In India’ will be more challenging. A very strong currency also means weak corporate earnings.

Is there any scope for the markets to re-rate?

There is very limited scope for market re-rating. This can happen only if the PE multiple keeps going up. That can happen only if the US does not raise interest rates. But that may not be the case as the Fed has indicated rate hikes from later this year. So there is potential for short-term pain.

Are there any contrarian themes to bet on now?

I believe that gold as an asset class would be a good contrarian bet right now. It has done pretty badly over the past few years, so there may be scope for improvement.

Inflation-indexed bonds too may be looked at. The WPI may not be zero or negative as it is now for very long. So as WPI increases there may be scope to make money in inflation-indexed bonds.

Is there any scope for a sovereign upgrade?

If oil prices remain weak, then there is definitely a chance. Also, when GST gets implemented, some three-six months after that, there should definitely be scope for a sovereign upgrade.

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