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BW Businessworld

'Invest In Funds With Value Strategies'

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Starting this week we introduce a fortnightly feature on mutual fund perspectives. We will be speaking to a number of fund managers on their views on the market's direction and drivers, and the consequent impact on mutual fund investors.

With uncertainty looming over financial markets sparked off by the European debt crisis and domestic concerns over rising inflation and interest rates, investors appear to be clueless. Sankaran Naren, CIO Equity at ICICI Prudential AMC, concurs with the view that overseas markets have a greater influence than domestic concerns on market movements. Talking to Businessworld's Mahesh Nayak, his advice for investors is to look at oil markets and food price inflation that have been worrying investors across markets - retail and institutional. Excerpts from the conversation:

What do you make of the overall crisis in the global economy and financial market? What is your take on the Indian equity market?
The European economy consists of countries that are strong, and countries where there are debt and growth concerns. We expect the periodic shocks to continue. The only potential sustainable solution seems to be the issue of a Euro Bond backed by all countries of the European Monetary Union to fund the problem of crisis countries.

The Indian market correction has been primarily a result of these concerns, which have led to FII (foreign institutional investors) selling. However, the Indian market is well poised due to the benefits of good monsoons, moderating food inflation and marginal crude price reduction with the potential to mitigate fiscal burdens. It's an opportunity to invest as markets correct.

As an investor what would be your strategy?
We believe that in the current environment local factors have been positive coupled. We therefore recommend that rather than focusing on global concerns, focus should be on crude price direction, which if corrected significantly, provides the opportunity to further increase allocation to Indian equity. Also, we continue to believe that there exist pockets of value across sectors to be unlocked by investors through investing in funds with value strategies.

Where are you investing?
I am investing in short-term debt mutual funds. However with crude oil correcting I will consider investing in equities as well as hybrid funds.

What call will you take on the overall portfolio of ICICI Prudential? What will be your short-term strategy?
There are pockets of valuation attractiveness across sectors and market caps. For instance there are certain large cap stocks that are attractive viz a viz peers.   We therefore believe that rather than pick a sector, a bottom up stock picking strategy is what will help generate alpha. Our focus therefore is on identifying good businesses at the right prices that will help add value to our portfolio

In the current market condition what is the fund house advising clients? (As what to buy or sell)
We have been advising our investors to systematically increase exposure to Indian equities with due regards for overall asset allocation discipline. It is important for equity investors to maintain their absolute levels of exposure to equity throughout the correction. This implies buying more of equity as markets correct to reach back their predetermined allocation level. We have been recommending our investors value funds like ICICI Prudential Discovery given the scenario of valuation attractiveness across sectors and market caps that can be best leveraged through the value strategy.

Where do you see inflation and interest rates over medium term, do you expect a further hike in interest rates in the current financial year?
Inflation numbers have a base effect which was expected to be negative for August and September. The numbers that have come in are therefore in line with expectations. However, a good monsoon has resulted in the coming off of food inflation which is a positive factor. In view of the above, we believe that we are toward the peak of the tightening curve of RBI; however, it is too early to comment on when rates are expected to come down.

We should also remember that administered price hikes like that has been done in petrol is clearly positive for the fiscal scenario since the under recoveries of the petroleum sector goes up. Hence while a hike in fuel prices can lead to a spike in inflation, the long term benefit to the fundamentals of the economy outweighs the problems of inflation.

How do you see the flow of money in the AMC? How has it been since March 2011?
We have been clearly seeing some positive trends like increase in number of SIPs and no significant redemptions during corrections. This clearly indicates that there is been some change in investor behavior whereby they rather than panicking in case of correction have been looking at it as an opportunity to invest.

In your view what will be the next trigger for the Indian equity market?
It is difficult to predict direction given that a lot of influencing factors are macro in nature and are beyond control. However, volatility is clearly expected to continue and should be looked at as an investment opportunity. The upside triggers for the market will be, a correction crude oil prices and inflation which will help reduce the fiscal burden. Also stability coming through on the global front will definitely help improve sentiment.  However on the domestic front, a shift towards improving investment in infrastructure and focus on the investment theme will help improve sentiment as well.