Feb 07, 2013 02:19 PM IST | Source: CNBC-TV18

Equity mkt more interested in Budget than GDP data: S Naren

According to S Naren of ICICI Prudential AMC some of the data used in arriving at the GDP data is back dated and equity markets tend to look forward.

The CSO pulled down GDP forecast for the current year to 5% versus market estimates of 5.5% lowest in a decade, on account of poor performance of manufacturing, agriculture and services sector.  The service sector is seen slowing drastically to 6.6% from 8.2% year ago.

This news was a non mover for the market and the key equity benchmarks continued to trade flat. According to S Naren, Equity - CIO, ICICI Prudential AMC some of the data used in arriving at the GDP data is back dated and equity markets tend to look forward.

"From an equity point of view we do not look at the GDP number, which will come out in February. We look at what will happen in the Budget in February. If that genuinely serves fiscal consolidation, then we would be happy," he said in an interview to CNBC-TV18.

Meanwhile, he added that retail participation in the market continues to be poor and reduction in interest rates may revive sentiment and attract funds. 

Below is the edited transcript of S Naren’s interview with CNBC-TV18

Q: The gross domestic product (GDP) number is a shocker, 5 percent; nobody in the street has a number like that. How would you react to it as a market man? Would you stop buying shares?

A: Some of this data is back ended and what equity markets tend to do is to look forward. The steps that have been done since August-September have been pretty positive for e.g. nowadays disinvestments happen where number of institutions participate. Our market is seeing one disinvestment today and it saw one about five days back.

So, we have had a good set of news, which has happened post August and that is very important for the market. From an equity point of view we do not look at the GDP number, which will come out in February. We look at what will happen in the Budget in February. If that genuinely serves fiscal consolidation, then we would be happy.

Q: If the data has its way of impacting on policy going forward, it now looks like the Central Statistical Organisation (CSO) knows something about the Q3 GDP number and that is going to be seminally below 5 percent, at least that conclusion can be very safely drawn. So, hit with 4.5-4.8 GDP for Q3. Are you expecting that there could be more rate cuts? How would your therefore reaction to the bond markets be. Would you buy the rate sensitive, how would you approach fixed income?

A: The challenge has been that deposit growth has been very low. Deposit growth has been low because of very high current account deficit. In my opinion in India we do not realise that in GDP growth there is also an effect of net exports and exports minus imports, if you have a spiraling of current account deficit as we have had that has a big impact on GDP growth, which none of us think about. That would also be responsible for the way the data has come today.

In my reading, till deposit growth increases meaningfully, it is difficult to see interest rates come off as easily as we did. In the last one year government has done a fair amount of open market operations; they have done a fair amount of cash reserve ratio (CRR) cut and despite that you find that the one year fixed deposit rates are not very low.

We are not so worried about interest rates. If we are able to get over a situation where fiscal consolidation starts happening then the fixed income markets and the currency markets would all be positively impacted. If one sees the way currency has appreciated in the recent past, is totally a function of policies that have been done like disinvestment, increase in diesel price, all these have helped the currency and bond markets also.

Q: How you think the Nifty is going to play out up till the Budget at this point in time. Is it going to be the consolidated sort of trend and what you think is factored in because most of the data such as the fiscal deficit number for FY14 is already out in the open?

A: Everyday there is Rs 1,000 crore foreign institutional investors (FIIs) inflow data, and the market doesn’t go up. We as market participants do get surprised by that. There have been some local redemption but the local redemptions are not so large. So, what has happened is that there is FIIs buying, there is local redemption and there is new paper being issued. The combination of these things has resulted in the market going nowhere.

Therefore, in the phase ahead of Budget, I do not think one can see market spiraling or something like that. What happens to the Budget is more important than what happens to the market before the Budget is what we in the mutual fund would believe. What we would like to see in the Budget is a credible fiscal deficit reduction programme, if that happens then current account will come down and give big room to the government to ease interest rates.


Q: Given the current mix of data and policy promises that you have, do you think you will get as decent growth in the Nifty as we saw last year. What are you looking at in terms of equity gains?

A: The positioning of the domestic investor is like equity is a forgotten asset class. The positioning of the foreign investors is that the emerging market equity is the place to be. We have a dire negative positioning of the local investor that if interest rates do come off because of the fall in fiscal deficit and interest rates, one will find that the domestic investors effectively short the equity.

In the last five years, they have invested 32 lakh crore in bank deposits, maybe 7-8 lakh crore in gold, untold amount in real estate and they have pulled out money from equity in the last five years. So, domestic positioning is so adverse that if interest rates were to come off, then there is a huge scope for inflow from domestics and that is what can drive the equity markets.

From an international point of view, I do not think the positioning is light on in India, but it is very light on equities. We have had five years of no inflow into equities. January was possibly the first month where we saw meaningful inflow into equities across the world and that positioning is just the start in my opinion. So, there can be a massive inflow into global equities in the next five years.

Q: If things are going to pan out as positively as promised as you say, which sectors will you sit strong on in anticipation of this calendar year?

A: Sectors like technology pharma, textile are sectors where without looking at government policy one can be very positive. While looking since 2010 October, I have been thinking that an infra theme is going to play out. So far it has not played out. Even today no one believes that that theme can play out. But I don’t think there is a choice that theme has to play out whether in 13 or 14. But it is just testing people.

The consumption theme, which people keep talking about I have been conservatively positioned since 2012 beginning. Almost for last 1-1.5 years we have been underweight the consumption theme. It has not worked because consumption continues to boom. But the theme shift from consumption to infrastructure has to happen.

Export is a very safe theme. Currently, the other advantage is many of the regulated sectors are trading very cheap. Therefore one can buy certain set of stocks for moderate returns because they are very cheap at this point of time.

Q: What would you read today's market reaction as? It has been pretty mature. We are 18 points off the day's high, but it has been a drastic reaction to that 5 percent estimate, which has come in for FY13. How would you read it?

A: People believe that equity market has to reflect the news of the day. What equity market always shows is what is happening – what the market believes can happen over the next one year. Equity market is not a backward-looking market. It is a forward-looking market and people tend to think it should be backward-looking.

We have seen over a period of time if you are able to identify periods of pessimism and when valuation is achieved you tend to make a lot of money. The decision for the domestic investor has been complicated because the domestic investor has massively underinvested equity, but the global investor has been investing consistently in equities in India.

That is the reason why the decision has been complicated and that’s why the domestic investor has no choice, but stagger his investment in equity. But one can’t be continuously short equity. People are looking at backward data. I don’t think backward data is a way to look at equity markets and we have seen it over a period of time to look forward.

We are happy with the decisions that the government has taken post August-September. If that continues in February and there is a massive effort to cut fiscal deficit you will have actually a good period where interest rates will come down and boost equity markets.

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