Inflation, higher PLR rates a concern: IDFC MF

Rajiv Anand, Head Investments, IDFC MF  feels that the market's condition depends a lot on inflation. He said that if we go deeper into data, it shows that there is no joy in terms of commodities and there is still space for inflation to go up.

On the other hand, he believes that higher interest rates in terms of PLR will also be of a great concern. In the short term, it may be stable but still remains a concern area, he added. He is still cautious looking at the market condition.

Excerpts from CNBC-TV18’s exclusive interview with Rajiv Anand:

Q: What’s your sense of where the bond yields are heading from here and how you would position yourself in the rate sensitive now?

A: It’s all about inflation. We have seen a cracker of a number last week but if one looks deeper into the data there do not seem to be any joy in terms of the commodities there; there is still space for inflation to go up. Let’s leave out the whole base effect story for a moment but fundamentally we have gone through about 200-300 of the 430 odd and we still find that there is still space for inflation to go up. Therefore to that extent, inflation will continue to remain a concern.

Second, it is imperative that we see pass through higher interest rates into the economy in terms of PLR and that in turn will bring demand down and therefore inflation. I would still continue to remain cautious as far as interest rates are concerned. Interest rate perhaps in the short-term will remain stable and could head higher on the back of higher inflation.     

Q: How do you read the environment for equity for next few months and do you feel this is genuinely the best time to buy or do you think there might be better buying opportunity somewhere down the line this year?

A: The whole story is about headwinds; the macro headwinds in this country are well-said inflation slippage in terms of the fiscal depreciating rupee etc. What we have seen so far is rerating or a derating of PE. The key now is what happens to earnings going forward. At this moment, the market is pretty sanguine as far as growth is concerned in general.

But we should see some semblance of growth coming off either on the back of commodity prices, higher interest rates. Another leg of some sort of downtick in this market is also seen. If growth continues to remain at 7.5% then it’s inevitable that inflation will continue to remain high or head higher in which case we are going to see higher interest rates. So by definition, we have to see a lowering of growth and growth estimates have not happened yet.     

Q: Even as a sectoral call what would you keep your highest exposure to right now?

A: It is a difficult one. What we are really doing is running a fairly balanced portfolio across sectors at this point in time, a slightly larger cash positions. It is probably easier to talk about sectors that we are trying to be a little underweight at this point.

Real estate and banking and most of the interest rate sensitives are something that we are a little underweight at this point in time. But otherwise, we have big bets across sectors at this point although we do have a little bit of extra cash.

Q: How would you approach the infrastructure lot right now, the GMRs, Punj Lloyds and JP Associates? They have got beaten out of shape, can you accumulate them or still a risky place to be?

A: There could be some merit in some of these, one would have to look at it on a stock specific basis. The problem is not so much about valuation any more. In this business, topline growth does not seem to be a too much of a problem, bottomline growth or margin seems to be a bit of an issue. But more importantly, we are now in the execution phase and are seeing a fair amount of delays for all sorts of reasons. That is a key concern, so one needs to be little vary as far as these stocks are concerned.

Q: What is your broader call on markets for the next two-three quarters? Is equity the right place to be or should one be looking at fixed income products now, which was your earlier avatar as a bond fund manager?

A: We are in trouble times at this moment.  As earnings come through there is not much joy to push this market up, on the back of that there are uncertainty of politics and elections. So, you are basically seeing a fairly long period of uncertainty in the nine-twelve months vicinity where this market is not doing anything in particular.

As against that you have the option of getting into money market funds or Fixed Maturity Plans (FMPs), which would probably give you returns of 10%-11%. Therefore, if you are a one-year investor it probably makes sense for you to get into bond funds but if you are a long-term disciplined investor then probably it does make sense to accumulate every time the market comes off a bit. Once we get this whole election issue out of the way, inflation will begin to ease at some point in time. The good time should be back but that is sometime away.  

Q: In a perverse sort of way, has all this RBI action been good for the equity markets because they were quite candid about the fact that they didn’t want to see any more depreciation on the rupee? Do you expect to see a significant scale back and hence flows to turn around a little bit or you are not expecting to see a big bounce back for the rupee this year?

A: We do not anticipate a big bounce back on the rupee at anytime soon. One should remember that the current account deficit is fairly large. We have also seen the RBI concerns in terms of non-oil imports etc. So unless commodities come off and one sees a slowdown in imports it is difficult for the rupee to appreciate from a trade perspective. We are seeing a continued outflow out of emerging markets and India in particular. The outflows will continue for a while longer in which case an appreciation may not necessarily happen. We will probably get about USD 2 billion into money market instruments or shorter-term because the debt FII limit has been opened up which is a temporary reprieve.          

Disclosure:

It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.