Not Seen a Better Macro Picture: S Naren
when you hit a bubble, we are not seeing signs of a bubble yet. In yellow, you have to look around and be careful, you cannot invest blindly.
We have been marketing our dynamic asset allocation funds which are hybrid funds having a mix of debt, equity and arbitrage. We believe that the equity cycle will peak when capacity utilisation goes up, a few years later. Already the market is accounting for earnings growth. The lesson of every boom is that people forget asset allocation. In any boom, the single rule people should apply is do asset allocation. We are no longer in a phase where we can invest only in equities.
Financials are a large part of the Nifty. Can growth continue there? One of the worries is that two years from now, it is possible that 40% of the benchmark will be in financial services. That worries us because historically whenever any sector touches 40%, that sector turns volatile. When money goes out of the market in the future, they will have to sell financials and that will lead to a situation where the sector becomes high beta. The fact that 35% of the Nifty is in financials makes it a riskier sector, that is our worry. The near-term situation looks good, but the high weightage makes us worry about the beta of the sector. We had a thesis that while interest rates come down and credit growth does not pick up, financials will not do well. We feel that the inter- est rate cycle has only 3-6 months to go, after that the leveraging cycle will start. In that cycle, banks will do well. Hence near- to medium-term outlook for banks is good. One of places where we feel profits will rebound in the next 2-3 years will be financials. This is because NPL recognition has happened, provisioning will happen, it will peak and then come down. So the medium-term outlook is good, and the long-term outlook is dependent on how equity markets move. If equities see a correction, financials will participate in that correction.
What is your biggest worry from the market perspective now? If people say equity is the only asset class and say we want to invest all our money only in equities and not in other asset class. Investors should follow asset allocation. A lot of the money which is coming in is coming in hybrid funds which have both equity and debt. However, the good thing is that there are no big flows in mid- and small-cap funds.
How are the macros looking? In my 28 years of working, I have not seen a better macro picture. You have low fiscal deficit, low current account deficit, low inflation and a concerted effort to reduce wasteful subsidies. I have seen 1991 and now.
You have low fiscal and current account deficits, low inflation, concerted effort to reduce wasteful subsidies, a low credit growth environment. I would want to see a weaker rupee and lower interest rates as these are important to stimulate production and exports. In August 2013, the rupee was at a higher level than today, so the rupee has appreciated since then and there is clearly an inflation differential between India and the US. I believe that $390 billion of forex reserves is more than what India needs. We can have lower foreign reserves and lower debt.
Are you worried about the shortterm disruption due to GST? GST will create a national network. With all the steps the government is taking to speed up logistics, etc the positive impact of GST over three years will far outweigh the short-term problems. India has launched it at a time when it is easier to get an internet connection. It is easier to implement from a technology perspective.