Market to remain buoyant if commodity price fall continues: S Naren, ICICI Prudential AMC

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'Markets to remain buoyant if commodity price fall continues'

Sometimes the valuations tend to become extremely attractive when sentiment is down.

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In an interview with ET Now, S Naren, CIO, ICICI Prudential AMC, gives his views on the market. Excerpts:

ET Now: The bulls are of the view that commodity prices have corrected and it is time to put money to work. The bears are of the view that markets have seen some degree of run up and valuations are looking stretched.

S Naren: The market had very good margin of safety in March. Now the margin of safety has diminished primarily because the market has done pretty well in the last one month. We would like to see a fall in commodities prolonging and continuing. Unfortunately in the case of gold the fall in prices encouraged Indians to buy. It appears that the gold import would go up again because of that. Right now we are in a mixed territory. The fact that short-term interest rates have not corrected is a negative at this point of time. We would love to see short-term interest rates correct at this point of time because that is a sign that a lot of money would be available later for investment. That part is not happening at this point of time. What we expected in March was a fall in interest rates across the spectrum and also a possible uptick in the markets. What happened was the long-term interest rates fell, but the short-term interest rates did not fall.

ET Now: We have been seeing some redemption pressure for equity funds for a while. Is that changing now? Do you see more money flowing into equity funds?

S Naren: That is the problem of 2012-2013. This is more because people who invested in the year 2007-2008 had invested on a big uptick based on past returns. After seeing five years of no returns, they got out. As the year progresses five-year return would improve and the people who invested in 2008-2009 are likely to be happy. I am not worried about redemptions from local mutual funds, but we would love to see the trend of lower commodity prices and lower interest rates percolate to the economy.

ET Now: You do not own consumers. You do not own autos, you have a very little exposure to FMCG but you have a very strong exposure to commodities. In your last declared portfolio you owned Cairn, NMDC and you also had some exposure to Oil India. At a time when global growth is a question mark, why are you bullish on commodities?

S Naren: Sometimes the valuations tend to become extremely attractive when sentiment is down. Today most of the commodity stocks have a fair amount of cash in their balance sheets and they are actually trading at one of their lowest valuations in the last 5-6 years. We need to have lower current account deficit and trade deficit and towards that process, there has to be a slowdown in consumption. Surprisingly, consumption has been holding up much much better than I anticipated, but I do not believe that you cannot have lower inflation without slowdown in consumption. It was playing out till about 15 days back which is one of the reasons why it could have been very easy to be positive on everything about 15 days back, but now with the increased crude price, increased gold price, again we are back to a situation where we believe a slowdown in consumption is required.
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