Market Outlook : by Mr.Sankaran Naren, CIO, ICICI Pru AMC

Below mentioned is an interview given by Mr.Shankar Naren, CIO of ICICI Pru AMC, that appeared in Economic Times. He manages Rs.16,000 crore across 22 equity schemes of ICICI Prudential Mutual Funds. Click here to read the original article.

The government's indecision in raising prices of subsidised fuel is weighing on Indian equities. An increase in retail fuel prices will boost an already-elevated inflation, but could remove the haze that is clouding the markets' prospects and signal that the current downturn is nearing its end, said Sankaran Naren , chief investment officer-equities, ICICI Prudential Asset Management.

"The fact that diesel and LPG price hikes have not been passed on is the biggest concern. Inflation will go up in near term once prices are hiked, but the way the equity market works is that perfect bottom happens soon after the crisis, like the Lehman one," said Naren, who manages assets worth about.Rs.16,000 crore across 22 equity schemes. The fund house, India's third largest, handles total assets worth .`73,551 crore.

"Once bad news is announced, the market tends to look forward more positively," he said. New Delhi has repeatedly deferred decision on lifting the stateset rates of the three regulated petroleum products - diesel, kerosene and cooking LPG - despite rising global crude oil prices. Last week, Prime Minister's economic advisor C Rangarajan said the government must raise fuel prices to achieve the budgeted fiscal deficit target of 4.6% of GDP for the current fiscal year.

Naren said that the outlook on the Indian market is brighter than it was six months earlier, as inflation is seen softening, going ahead. However, global economic outlook has become grim as the US Federal Reserve's bond buyback programme or QE2, to pump billions of dollars into the country's banks, comes to an end in June. A portion of this money found its way into emerging markets and commodities including crude oil, driving prices higher. With this money flow expected to dry up, commodities prices are likely to soften globally that will in turn reduce price pressures in emerging economies.

"The outlook for the world is turning bleak and India has gone through a tough period of handling inflation in the last six months. So, if India is able to fiscally tighten through diesel and LPG price hikes, then most of our problems will be behind us," said Naren. The government will release May inflation numbers later this week and most economists expect headline inflation to accelerate to about 9% from 8.66% in April.

The fund house's top stock picks would include infrastructure, once interest rates peak as valuation is cheap after three years of subdued performance. The sector has been battered due to rising interest rates that curbed demand. "It's a sector that has got derated tremendously and at the point of interest rate peaking, it will be extremely cheap because people would have almost given them up after seeing three years of pain," said Naren. "Concerns over (earnings) growth will remain even then, but many of the stocks are trading below book and when the (interest rate) cycle peaks, it should trade lower. We can't have a country where only consumption grows and infrastructure doesn't," he said.

The Reserve Bank of India has raised policy rates nine times since April 2010 to tame stubborn price pressures. The central bank will review its monetary policy again on June 16.