Bet on equities for three years, debt for one year :Sankaran Naren, CIO, ICICI Prudential AMC: Business Line

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Will stock market continue racing higher in 2015? Which sectors will shine? Some top equity fund managers gaze into the crystal ball to give answers

Indian equities are one of the best asset classes and investors should stay invested with a horizon of three years and above, says Sankaran Naren, CIO, ICICI Prudential AMC

You are known for your contrarian bets. What are the themes that investors are currently shunning, which can deliver over the next two years?

An asset class offers value when there is fear, lack of flows, low past returns and low valuations in the market and at this point fixed income meets all the four criteria. India’s CAD (current account deficit) has corrected and inflation numbers have come down, making way for a potential interest rate decline. Therefore, it is very attractive to bet on fixed income in 2015. In equities, the three attractive themes are banks, because the leverage cycle is expected; utilities, because we are positive on interest rates coming down; and technology because of a strong dollar.

Given the slowdown in corporate earnings in recent quarters, what is your earnings expectation for FY15 and FY16?

The macroeconomic scenario for India looks healthy with positive outlook on both inflation and current account deficit. This should translate into lower interest rates which will increase demand and improve corporate profitability. Our earnings expectations for FY15 are 10-12 per cent growth while in FY16 earnings growth is expected to be at 14-15 per cent. 

Do you think that equity prices have run ahead of fundamentals? How comfortable are you with market valuations?

While currently the market is fairly valued, one can derive comfort as economic recovery is likely over the next three to five years. This is true for most sectors considering 2016-17 valuations.

There is also scope for capacity utilisation to improve in many industrial and manufacturing sectors. As the capacity utilisation picks up, equities could deliver reasonable returns. We maintain that Indian equities are one of the best asset classes and recommend domestic investors to invest with a horizon of three years and above.

What is your view on the rupee? What is your view on pharma, textiles and IT companies whose fortunes are linked to it?

The central bank has been following a policy of containing volatility in the rupee, which has helped most companies to have fewer worries as opposed to July 2011 to July 2013. The rupee is likely to be range bound.

The two things we are very positive on with a three-year view are India as an economy and the US dollar as a currency. Therefore, companies that are export-oriented are more likely to benefit in this scenario.

The recent correction in technology does offer an opportunity to invest in the sector. For a long time, we have been very positive on pharmaceuticals but it is no longer cheap. IT looks cheaper than pharmaceuticals.

Commodity prices have been falling for two years now. Is it time to start betting on a revival?

Commodities today have become contrarian buys with a long-term view. However, in the near term, the fall in the prices of crude oil has created instability at the macro-economic level in countries like Russia and Brazil, amongst others. This, in turn, has led to a degree of risk aversion in capital markets. 

The short-term view looks unclear because it is possible that some of these countries may get severely impacted and cause further fall in commodities. But for the long term, commodities are becoming attractive.