Market correction a good opportunity for long-term investors to enter: S Naren, ICICI Prudential AMC

I think investors are exposed because if you look at supply and demand dynamics, over the last four months, while foreigners have been the sellers, local investors have been buyers. Also, there was retail euphoria which was evident in IPO oversubscriptions. The continuous one-way move from April 2020 till Nov. 2021 made investors believe that there are no risks in equity markets. Both valuation and investor exuberance was a problem which is why we recommended asset allocation and debt funds.

Geopolitical tensions have always been a good opportunity to buy in the past but do you feel this time it’s different and if not, is this the perfect time to dive into equities once again?

You used the magic words: this time is different. The reality is, and I was just telling my colleagues this that after spending 18 years at ICICI Prudential luckily, I had not seen war. Unfortunately, I'm seeing one now and it's very depressing. So the reality is that it is a very complicated situation. Hence the outlook for the near term becomes very difficult to predict. However, for the market to deliver returns, the Ukraine conflict has to resolve. So the near-term market prospect is totally dependent on the outcome of the Ukraine issue. If the issue escalates, further correction cannot be ruled out. In case the conflict is resolved, there is a possibility of a sharp trading rally.

The lesson that we have learned over the years is to practice asset allocation at such uncertain times. For a long-term investor, the current market correction offers a very good opportunity to invest systematically over the next 12 to 18 months as we remain positive on India’s long-term structural story. We urge investors to adhere to their asset allocation with systematic investing both in equity and debt funds.

The external sector is obviously now the biggest threat but in light of recent domestic data, are you readjusting your expectations from the domestic economy, especially on the consumption and capex side?

There is no problem with Indian economic recovery. I don't think there is a problem with the business cycle at this point in time. The challenge currently is mainly in the form of higher commodity prices.

So far inflation has not been a major headache for the RBI but one gets a sense that what has happened to crude oil it will eventually become a big concern. Your thoughts.

A massive rise in the oil prices which has happened is negative for India. In the past, oil price increases resulted in oil subsidies between 2011-13 which led to an increase in the current account deficit and Rupee spiraling. Inflation too edged higher. However, commodity prices going up is a challenge for the RBI and the Indian economy.

If you're sitting in the RBI’s chair, it is a very big challenge today to decide how much of the inflation is transitory if one of the world's biggest providers of sunflower oil goes away, aluminum and steel prices shoot up.

From the point of view of an investor like us, we can find products like floating rate bonds that are very attractive because we don't need to worry about anything there.

Would you expect the RBI to now take more cognizance of inflation and probably quicken the pace of normalization that probably would have not happened if this situation had not occurred?

Since there is a time gap between the two MPC meetings so, if the situation in Ukraine does not normalize till the next MPC they will have absolutely no choice but to normalize because the oil will be so high till then that if they don't normalize, we would have a real inflation shock.

You have a 10% exposure to gold in your Multi-asset fund, which did come down by 100 bps in January from the December level. Going ahead, do you expect to be increasing your exposure to the yellow metal?

We will do whatever is logical from an investor's point of view, and the framework of the fund. We try to see what we can do from a risk-adjusted return point of view at all periods of time.

Coming back to the macro picture, one of the collateral damages of the current Ukraine crisis has been the rupee. Do you do see further risk for the currency given that we are seeing a widening of the current account deficit?

The Reserve Bank of India has managed Rupee brilliantly. Last year, they accumulated $150 billion of foreign exchange reserves. So, Rupee is not in any way a brittle or fragile currency. Having said that, with the tide of oil prices turning, trade deficits will go up. I think the phase of rupee appreciation is over and how much it depreciates depends on what happens to crude oil prices and various other parameters. I would still say that things are stable but not as good as 2020 and 2021. I think we are headed for a more volatile period on the currency, but India is not fragile. On the deficit side, the situation is not as comfortable as in 2020 and 2021. Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.