Not Seen a Bet­ter Macro Pic­ture: S Naren

The Economic Times - - Money -

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.

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