We spoke with Naren shortly after the FM's Budget speech, to get his perspectives on the road ahead. Naren says growth in the near term remains a challenge, and one will have to be more patient for growth to accelerate to levels we hope to see. Our equity market over the next 12 months is likely to remain coupled with global market trends, rather than getting decoupled right away - as one should expect decoupling only when our growth momentum starts visibly accelerating. Naren believes Indian fixed income is the most attractive asset class in the world, and fortunately, the pragmatic Budget arithmetic does nothing to jeopardize the rate cut cycle that has recently commenced.

WF: What are the key highlights for you in this Budget?

Naren: This is the first Budget in recent memory where the revenue estimates seem realistic, perhaps even conservative. Tax increases have been effected in many areas - service tax, excise duty, duties on cigarettes, customs duty on some items, corporate tax for FY16 has also gone up, in the last few months petrol and diesel excise duties went up significantly. In this context, the revenue targets set in the Budget appear very achievable - which we are seeing after many years. This to me is the major highlight of the Budget. Sadly, this revenue mop-up exercise has drawn even mutual fund distribution into its ambit, with MF distributor commissions now attracting 14% service tax.

Second major highlight is the focus on increasing infrastructure capex. Allocations to roads and railways have gone up meaningfully.

WF: What are some of the negatives in this Budget?

Naren: Markets want growth momentum in the economy to pick up fast. If you look at evidence on ground in terms of 2 wheeler growth, auto growth, petrol and diesel sales growth, power production, credit growth - in all these indicators, we are not seeing growth picking up in a big way. That quick recovery in growth which markets want, is not yet evident, and markets have not really got anything from the Budget to give a hope that growth will pick up very quickly. That is a bit of a near term worry. There is some direction in terms of spurring infra growth. Now, whether increase in MNREGA allocations will spur rural consumption, is something to be observed. What we understand is that growth recovery will take a little more time.

WF: Equity markets ran up significantly in anticipation of big bang announcements. But, with the last quarter earnings numbers being a disappointment, and with on-ground evidence as you say suggesting that growth is not recovering as rapidly as markets hoped for, what is the near term outlook for equity markets, going forward?

Naren: To me it appears that for the next 12 months, Indian equity market will be coupled with global markets. We look at our market and say it is at an all time high - but we forget that many markets around the world are also posting new highs - whether it is US, Japan, UK, Nasdaq. With the exception of commodity exporting markets, most others are posting new highs. The reality is that India is scaling new highs because global markets are scaling new highs.

Our view is that India will get decoupled from global markets over the next 3 years, as we see more solid evidence of rapid growth in our economy. But for the next 6-12 months, I suppose we will be influenced largely by global market trends, because it will take some time for our growth momentum to really pick up.

WF: What is your outlook on global market trends over the next 12 months?

Naren: Markets can turn choppy if US decides to go ahead with interest rate hikes. If however, the US continues with an accommodative monetary policy, then it will join other developed countries who are ensuring easy liquidity conditions - which means global equity markets will continue to be supported and can continue moving up.

WF: What should one therefore do with equity and debt allocations now?

Naren: We have been saying that Indian investors must allocate incrementally out of physical assets and into financial assets. This Budget reinforces this message - the Government is also sending out the same signal. Whether it is the gold monetization scheme, or the FM's thrust on saving for retirement or tax free infra bonds, the message clearly is to enhance financial savings.

We believe Indian fixed income market is perhaps the most attractive asset classes in the world right now. The Budget arithmetic does not give any reason to worry about the fiscal situation, which means that interest rates will head lower in the quarters ahead. The only risk factor I can think of is if oil prices head to $80 and above.

On the equity front, we have been advocating large caps and dynamic asset allocation products like our Dynamic Fund, Balanced Fund and Balanced Advantage Fund. We prefer large caps over midcaps at current levels. In terms of sectors, we like some of the regulated return companies, we continue to like IT, we selectively like some infra names from a bottom up perspective. One has to be very bottom up focused now as many quality names are no longer cheap and some companies which are low on valuations are not really on a sustainable growth mode yet.

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