This is a good time to invest in equity funds as the market is in a sweet spot and the correction has come as a big billion sale for investors, says Sankaran Naren, CIO, ICICI Prudential Mutual Fund while sharing his market outlook with media on Monday.
Equity market outlook
In 2012, the Organization of the Petroleum Exporting Countries (OPEC) (countries having a majority of share in FIIs inflows) invested heavily in our country. However, things have changed. The commodity bubble has busted and now the crude oil hovers around $28 a barrel.
These countries need money and which is why they are exiting India. The market has corrected not because of fundamental risks in India but due to the commodity crisis. However, India stands to gain from this correction. One dollar fall in crude price adds Rs.5 lakh crore annually to India’s kitty.
Hence, we believe this is a good opportunity for investors to invest in equities. If you look back, in 1998, market crashed during the Asian financial crisis, giving an opportunity for investors to take strong positions in equities. Similarly, there were opportunities in 2001-02 (dotcom bubble burst), 2008 (global financial crisis) and 2011 European crisis. Again, we have commodity crisis now and stocks are available at sale. I would say it is a big billion dollar sale in the equity market.
The only risk for the market is crude oil. We have observed that the crude price is directly proportional to the market. That means, if the crude price goes up, markets will go up and vice-versa. Any fall in crude oil price will trigger a sell off by FIIs and cause our markets to fall, providing a buying opportunity to investors.
India has a low current account deficit and the fiscal deficit and inflation are also in control. However, earnings growth has not picked up due to low capacity utilization. In other words, the money that corporates have invested is yet to yield result. We believe earnings growth will start in FY 2017-18. After that, corporates will start profiting even without investing.
Today, the market is correcting because of non-fundamental reasons. So India is definitely headed for a long term sustainable growth.
This year will be volatile for markets. Thus, it is the year of accumulating equities. We believe this is a good time to invest in equity funds with a time horizon of 2-3 years.
Coming to the recent correction, now the question is how long will it last? Dollar return for foreign investors from emerging market index which includes India, Russia and Brazil is almost 0% for the last ten years. Over a five year period, it is negative 20%. Hence, foreign investors have had a bad experience with emerging markets and are not likely to come back soon. These investors can only make money if they start concentrating on country specific products; however, it will take time. Currently, crude oil is trading much less than its marginal cost of production. Hence, over a period of time, production will go down, resulting in a revival cycle. Till that time, enjoy the big billion sale in equity.
Debt market outlook
If you look at inflation, expect pulses, the prices of all other articles are in control despite two poor monsoons. Look at the prices of cotton, diesel, petrol, steel and aluminum, all are in control.
Also, there is no worry to meet fiscal deficit target because the government has hiked excise duty in petrol and diesel.
All these factors provide headroom to RBI to cut rates soon.
