The Indian market has shown some resilience over the last couple of sessions. In an interview to CNBC-TV18, S Naren, CIO equity, ICICI Prudential says the market, barring a few consumer stocks, is reasonably valued. "The market can go to new highs. We need to see fiscal consolidation for that," he adds.
He further says if the fiscal consolidation comes, it would be very beneficial for the market. "If the government manages to do fiscal consolidation in the next four months, it would be very positive for the market."
He likes some of the names in the upstream oil space. "I think some of these stocks are really cheap relative to global valuations," he elaborates.
Since August, he has been pretty positive on the telecom space.
However, he is underweight on the auto sector. "We do like a few select two wheeler companies," he asserts.
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Below is the edited transcript of his interview on CNBC-TV18.
Q: We feared a deeper cut after, what we saw overnight, but our market seems to continue to hover around that 5,700 level. Do you think this rangebound trade will continue for a while?
A: A lot of money has come into India in the last one year. That has been of good help in the market rally of the current year. There have been ofcourse good announcements like the diesel price hike, which happened in September. It has also helped this. The next three months has got to see a continuation of the process of fiscal consolidation. The more the fiscal consolidation happens, the more the fundamentals of the market will become much more attractive.
Technically, the market could be strong because money from other parts of the world is coming into India. But that money could well reverse. So, it is a tough call right now to say whether techncials and fundamentals both can be positive. In that case, we can go to new highs. On the other hand, if you have only technicals, which are positive, which is due to the money is coming in from other parts of the world, while it can continue to go on till India gets the money, there is always a risk of reversal.
We, as mutual fund investors, would like to see a fundamental improvement in fiscal consolidation because that will preserve the longer term returns of the market. Whereas a flow based model doesn’t preserve the long-term return to the market. It gives good short-term returns to traders.
It has been very difficult to predict flows. So, that is why we would much rather have a situation like what we saw in September like an increase in diesel price hike. Now, there are going to be many opportunities for fiscal consolidation.
Q: What do you do with a sector like autos? We have seen a huge outperformance from Tata Motors today, but there are some cases of slowdown that we are seeing in stocks like Ashok Leyland, etc. In general, how are you placed in the auto sector?
A: We are underweight the sector because we thought that there would be possibly increases in diesel prices and petrol prices. There's a huge amount of oil subsidy. India has been the only country in the world with such a buoyant growth in petroleum consumption because of the subsidies.
However, I don’t think that call has really worked for us in the recent past. We do like a few select two-wheeler companies, which have also done well. Our view is that there has to be some slowdown in the sector. But since inflation hasn’t come down, the slowdown in the sector has also not happened. So, I think once we see the slowdown, then we believe that would be a time to look at the sector for the longer-term.
Q: SBI comes out with numbers tomorrow. What is your expectation on the same?
A: We do not comment on individual stocks. However, PSU Bank space, people are watching what happening to asset quality. Most of the reaction to stocks post the results have been based on asset quality. There have been one set of banks that have done well on asset quality. Another set of PSU Banks have not done well on asset quality. Price movements in the stock have reflected the moves in asset quality.
Q: Any sectors that have a degree of outperformance as we head into the end of the year? Most pockets are having issues of their own. If you had to plough in some money into one sector that could outperform, which one would it be?
A: We like some of the names in the upstream oil space. I think some of these stocks are really cheap relative to global valuations. Since August, we have been pretty positive on the telecom space saying that the worst is going on. We have always seen that wherever we have invested, when the worst is going on, in any sector, you tend to make a lot of money. These are the kind of things which we like. Midcaps, we have seen good amount of value in select stocks.
If you look at the market, baring a few consumer stocks, which looked overvalued and few high quality names, which look fully valued, the rest of the market is reasonably valued even today. Infact it is those few consumers stocks and really few stocks, quality names, are fully valued. That is responsible for fair valuation of the market. Therefore, there is a lot of opportunity in the market. The market can go to new highs. Ofcourse we need to see fiscal consolidation for that.
If the fiscal consolidation comes, it would be very beneficial for the market. If the government manages to do fiscal consolidation in the next four months, it would be very positive for the market. On valuation grounds, I think, except about 10-15 stocks in the market, the rest of the market doesn’t look worrying on valuation. That is why it is still a macro market.