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WF : The current market volatility is being attributed to a global sell off on account of banking sector concerns in Portugal and ongoing tensions in Iraq. To what extent should we in India be worried about this situation? Is this an opportunity to buy on dips or does prudence suggest waiting on the sidelines for more clarity on global cues?
Naren : The currently volatile situation in Iraq along with the unrest in Ukraine/Russia has kept crude prices on the brink, impacting India, an importer of crude. As far as the Portugal Banking sector crisis is concerned, banks defaulting could lead to a risk perception amongst investors towards emerging markets.
Also, the expectations were very high on the budget. Thus, there could be buying opportunities on dips which could give meaningful returns provided we are long-term holders in them.
WF : Some experts are beginning to worry about firming up of global commodity prices and their potential negative impact on India. Is this a key concern for you?
Naren : As India's focus is likely to be on infrastructure, low prices for global commodities is desirable. For instance crude oil is an important global commodity that India largely imports. The crude scenario could be an important global factor to keep an eye on. However, the unrest that we see in the Middle East cannot be expected to be everlasting. The other point is that the overall trajectory of the energy prices globally is on the downside, because we are witnessing a lot of shale gas production coming up in the US, which implies that the import of crude at least from that part of the world is coming down.
If we take away the geopolitical risks and the unrest that we are seeing, the medium to long-term trajectory of energy prices could be down, which is good for the Indian economy. It could also mean that processors of crude or the chemical industries in India could benefit because raw material cost would then be lower.
WF : The Union Budget has evoked mixed reactions from market participants. How do you see it?
Naren: The 2014-15 Budget brought in no unpleasant surprises for the markets. In fact, the budget seems to have met the market expectations. Post budget, we retain our thesis that the market would benefit from the economic revival over 3-5 years backed by a robust political situation and improving macro-economic variables. We believe that the market hasn't factored in the entire potential of economic growth and recovery.
WF : Which sectors and themes do you see as principal beneficiaries of the Budget and the policy announcements made so far by the new Government?
Naren : With economic indicators witnessing a positive trend and potential reforms by the new government, we believe that sectors/themes like banking, infrastructure, industrials, Public sector undertaking (PSUs) and the mid & small cap spaces can provide the best opportunities going forward.
The budget has laid out a clear road map to benefit infrastructure, banking, defense and insurance. The government's effort to make infrastructure lending cheaper, by removing the SLR & CRR requirements on long-term infrastructure lending could boost infrastructure as well as banking. PSU banks provide a huge chunk of infrastructure loans; cheaper infrastructure lending is a powerful positive for these banks that control more than two-thirds of the Indian banking system.
Several steps were ushered in to benefit rural infrastructure by making allocations towards rural power infrastructure, rural roads and building smart cities. Further, Real Estate Investment Trusts (REITS) got a push in this budget, which could aid deleveraging the real estate companies.
WF : Are there any new / different themes or sectors you will be looking at in the second edition of your Growth Fund series, when compared with the first edition?
Naren : For our second edition of Growth Fund series, we are looking for growth opportunities in the railways infrastructure, defense, power and insurance sectors. All the ancillary industries namely, wagons, steel, logistics, etc. are expected to benefit from investment in Railway infrastructure.
The budget has proposed a welcome move of raising the FDI limits in defence and insurance. India is the largest buyer and importer of defence equipment and the move to increase FDI in the sector will help boost domestic capacity and reduce dependence on imports. Further, the investment starved insurance sector will scale to new heights of expansion with the increase in composite cap of FDI limit.
We believe that, the new government's higher thrust on infrastructure, will help industrial growth scale to new heights in the coming years and as industrial demand increases due to economic revival, potential for growth in power sector is tremendous.
WF : Many advisors have expressed reservations on closed ended funds due to the relatively inflexible nature of the product when compared with open ended funds. Why do you believe closed ended equity funds serve investors well?
Naren : In case of close-ended funds, there is an opportunity to decide, when to raise the money. Also, as we know when the money has to be returned, we are in a better position to develop investment strategies that work well over the tenure of the product. It also allows us to choose a wider set of stocks with a longer term view. A defined term helps calibrate entry/exit points better for investments.
At this point of time, growth is likely to pick up over the next three years, and we would be in a position to move the portfolio into a defensive position ahead of the redemptions, at the end of the tenure. The entire benefit of Government's reforms policies could be visible in the next 2 - 3 years. Even if the markets go sideways in the near term, over a 3-year period, the long term outlook is very positive.
Further, investors are underinvested in equities and a close-ended fund ensures that investors stay invested in equities over horizon of the fund. In fact, these funds give investors an opportunity to invest with a three-year and plus view, without having to worry about the risks that lie ahead of the markets. By launching such funds, we may be in a position to give a better investment experience to our investors.
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