S Naren: Rally looks bit stretched, but markets will head higher if FIIs keep buying: S Naren

What is your assessment of the recent bounce in the market?

This rally was unexpected as the sentiment was largely negative and there were too many short sellers globally, when the US Fed made the statement that they had reached a neutral rate. We believe the market is not cheap at current levels, but if FIIs keep buying, markets will head higher. This rally now looks a bit stretched, but we can be wrong, if interest rates have reached the peak.

Is it a bear market rally or has a new bull market begun?

We feel there will be rate hikes in India and globally. There are periods of time when we can comfortably say that we are in extreme greed or extreme fear. But, at the current juncture we are in neither of them; we are somewhere in between. At such times we use asset allocation strategies. When we have extreme greed, the risks are higher, and we do not see extreme fear.

You are known for your value picks. Where do you see value now?
PSUs are one area where investors are disinterested. We believe there is value there. We need government support in ensuring value is realised there. The period just after the election has scope for big reforms. Hence, if one invests in PSUs with a two-year timeframe (given that elections are in 2024), the investment experience could be positive as these companies have a fair amount of value.

Which are the other areas where money can be made?

We have been constructive on financials as we believe interest rates are headed higher. Unlike the 2011-15 period, we do not have the non-performing loan (NPL) problem now. So, higher credit growth is likely and this could lead to higher lending profits without the problem of NPL. The lenders today are in a much better position. We are positive on pharma, as it has done badly post Covid.

Are you comfortable with mid-caps and small-caps?

Some of the mid and small caps are trading at premium valuations to large caps as there was no local redemption cycle. While FIIs sold, only the large caps corrected, along with IT names from small- and mid-caps. So, there is a larger margin of safety in large caps and relatively lower margin of safety in mid- and small-cap as this space has not seen a meaningful redemption cycle.

Where should investors focus in fixed income?

Debt has been an unpopular asset class for the last 18-20 months. After October, we believe debt will be a much more interesting asset class, especially after one more rate hike in September. We believe in that phase, the market is likely to be volatile, while debt will become relatively attractive unlike the last two years. This is because the yield to maturity will go to a level where it becomes attractive for investors. We think most Indian corporations will also start borrowing locally in view of the higher interest rates in global markets. Given the present market condition, investors can consider the floating rate fund and dynamic bond or all seasons bond category.

What could happen to markets if there is a global recession?

We are of the view that India will not go through a recession. A developed world recession will reduce some of the problems that India has, like high oil prices and inflation will reduce substantially. Our concerns on the current account deficit too will ease. While equity markets may correct, we should not be too worried about that as India remains one of the most structural markets. Use this correction as an opportunity to invest for the long term. Currently, in terms of valuations, Indian equity markets are not cheap and if a global recession comes by it will be a good time for people to move some money from debt to equity.