Life in Gurgaon

India’s stocks are hostage to US Fed rate cycle, says mutual fund giant

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For all the domestic drivers of India’s stocks — from oil to elections to shadow banking shakeouts — the US Federal Reserve holds the most sway, according to the nation’s biggest money manager.

Sankaran Naren, who helps manage 3.1 trillion rupees ($44 billion) as chief investment officer at ICICI Prudential Asset Management Co., says investors need to brace for a run of constrained returns that will last until the Fed’s Jerome Powell makes a policy U-turn. Key Indian equity indexes are up less than 10 percent this year, and gauges of mid- and small-sized companies are poised for their first yearly decline since 2013.

“Once the US interest-rate cycle changes and one moves to a situation where they say we are done with the quantitative tightening, then one may have a much more secular bull market in emerging markets and India,” Naren said in an interview in Mumbai last week. “We are in an accumulation phase of investing, where the near-term returns aren’t likely to be very high.’

While the US central bank’s influence on emerging assets is hardly an unknown phenomenon, India’s $2 trillion stock market has also been whipsawed in recent months by homegrown narratives. For Naren, those issues – including speculation on Prime Minister Narendra Modi’s election prospects in 2019, and a cash crunch in the non-bank financing sector – will mostly be resolved in the next year, leaving the Fed as the biggest factor.