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Home / Money / Calculators /  Unlike last time, growth is starting with high interest rate

Suddenly, every sector, every analyst and every investor has become optimistic post the announcement of election results. Some believe that the process of economic improvement was already under way and has come to light only recently. Mint Money caught up with S. Naren , chief investment officer, ICICI Prudential Asset Management Co. Ltd, who believes that this is not just a short-term phenomenon. According to him, the coming few years will be good for all sectors, investors and the overall economy. Edited excerpts:

Markets are at an all-time high, and not very cheap. The problems are not going to go away quickly. Are we moving ahead of fundamentals?

The day you start worrying that fundamentals are not going to improve, then what you are saying is correct. But our view is that industrial production growth will go to double digits in percentage terms in the next few years. And that inflation will come down over the next two years. Normally, when these two things happen, equities pick up.

Are the markets ahead of the economy? Quite likely. But when the outlook for the economy is improving, and we expect it to keep improving, markets will always be ahead.

What kind of improvements are you talking about?

I expect industrial production growth of 10-12% per annum, which will pull up the overall economy. Agriculture usually oscillates. So, industrial production is a better number to track than GDP (gross domestic product) growth.

How much time is the market likely to give the new government before changing its bullish nature?

The next big event is the budget. What are you looking forward to in terms of confidence booster?

For this budget, the government actually has less than a month to plan. So, this budget will not be able to do that much. It’s the next year’s budget that we are looking forward to. This year, we expect an overall thrust to reduce fiscal deficit thereby giving space to monetary authorities to cut interest rates. Also, if unnecessary subsidies are cut, it will be a positive. But we are not expecting earth-shaking reforms from this budget.

One difference between the previous bull run, which ended late-2007, and now, is that the previous one was a global phenomenon. That’s not the case this time. The European Central Bank, for example, recently took interest rates to negative; China is expected to slow down. In this set-up, is it really possible to have a multi-year bull run?

These are why it will be much easier because India will then be able to become the fastest growing economy in the world. In fact, India is possibly the only economy where growth can accelerate and interest rates can come down. Last time, India was one of the economies in a big pool doing well. This time, it could be one of the only economies doing well. The opportunity for India is fantastic and much better than the last time. At that time, when many economies did well, commodity prices shot up, which was inflationary. This time there won’t be commodity-based inflationary shock.

The real difference between the previous bull run and this one is that usually the cycle starts with a very low interest rate; but in India, it’s starting with high interest rates. So, in the next 18-24 months, interest rates will have to come down meaningfully, and that would be a very good indicator of economic performance. We are hopeful that the government and the Reserve Bank of India will work out a set of policies that will reduce inflation leading to lower interest rates.

Which asset classes are likely to benefit?

In the past five years, a lot of money has gone into gold and real estate, and both have very low return considering the investment. Now, considering gold is doing badly and real estate is underperforming, it is possible that money will come into financial assets. Whenever money has come significantly into financial assets, the growth rate of the economy has gone up because of much better capital output ratio on the money invested.

During this growth period, will we see patches of acceleration followed by subdued returns?

That may be the case. It will be irrational to believe that the markets will go up in a straight line. Even during the previous growth period of 2002-07, there was a massive correction in 2004, a swift one in May 2006, and other mini corrections. But there is short-term potential for equities and fixed-income products.

What do you look at before investing in a stock?

I find long-term history of a company very useful. Say, how the company behaved during 2008 crisis? How the company did in 2002-03?I also look at its valuations in context of its past. I should be comfortable with the management. And finally, whether globally people have made money in that industry or not.

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