Sep 20, 2012 05:30 PM IST | Source: CNBC-TV18

Axis AMC suggests invest in short-term bond

Inventors with six months to one year horizon should park money in short-term bond funds in the current market scenario, Rajiv Anand of Axis Asset Management strongly recommends.

Inventors with six months to one year horizon should park money in short-term bond funds in the current market scenario, Rajiv Anand of Axis Asset Management strongly recommends.

The yields on bonds between two and five years are in range of 9.25% and 9.50%, which makes the risk favourable for the investor, he explains in an interview to CNBC-TV18.

Meanwhile, Anand continues to be overweight on financials; consumers and IT sector. From the banking space, he is betting on the private banks.

"They have been much more nimble in managing NPLs and the interest rate cycle. That gives us confidence to be happy long-term shareholders in private banks," he elaborated.

Below is the edited transcript of Anand's interview with CNBC-TV18.

Q: How would you look at the equity markets at this juncture? We have got a political thunderbolt on Tuesday, does it now wake up the market to the limits of reform in the current political economic scenario, do you think the best of the market rally is behind us or not so?

A: I certainly hope not. I would like to hope that the government has had thought through the various scenario that could play out while they were taking some of these measures. In that sense, we are quite hopeful that the government will survive and will be able to push through these reforms as they currently stand.

If that happens, the ability of the government to be able to push through further reforms atleast from an executive perspective improves. We have had precedent of minority governments doing quite a bit of changes or reforms in our country in the past as well. Things look a little more hopeful in that sense.

The hypothesis that we are working on is the fact that given the fact that both the Fed as well as the euro zone seem to have sort of now given corporate America and to a certain degree have averted the crisis in Europe, we do believe that money will start to flow into riskier assets emerging markets in particular.

In that context, we should be able to get a disproportionate share of flows globally. From a local perspective, Indian investors have been net sellers for the last two years and it is just a question of time before that turns as well.

Q: How do you think you would be placed on the fiscal deficit scenario in FY13? How worried would you be possibly of a ratings downgrade considering that we are working in such a politically uncertain scenario?

A: The ten year bond is hovering around the 8.15-8.20% yield at this point in time in an environment where growth has slowed and slowed quite considerably into the 5% vicinity. What it is clearly seeing is that inflation will continue to remain sticky as we go forward. The market does not have the confidence that those numbers will come off or come off quite sharply in the medium-term.

Secondly, the market believes that we will see a significant amount of borrowing coming through because of a higher fiscal deficit number in the vicinity of about 6% not withstanding all that has happened over the last one week. We do believe that the measures taken over the last few days are very positive, but we have got a long way to go to be able to give the bond markets the confidence that the fisc is in control and therefore long bond yields will come off.

However on the other side, we have already seen significant measures in terms of improvement of liquidity. Therefore let us see a three months CD has rallied from almost 10% a few months ago, today down to 8-8.25%.

We do believe that the funding rate will come down as we go forward that will percolate into lower lending rates in the economy as well. From a mutual fund perspective, we will also see deposit rates come off which is positive from a mutual fund perspective.

Q: Will you say it will make sense to get into the fixed income side of mutual funds?

A: I think it does make sense. The best place to be on the fixed income side is short-term bond funds. The risk reward is in your favour, yields for anything between two years and five years bond still continue to be in the vicinity of between 9.25% and 9.50%. So I think the accrual is on your favour.

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Yes, the next rate move is down. In that context where liquid funds are already down to 8% or thereabouts, deposit rates are coming down, you are protecting yourself from the reinvestment risk by buying into short-term fund. We are very strongly recommending short-term funds as the place to put money for if you have an investment horizon of anything between six months to one year.

Q: Coming back to the equity markets, what would be a good thing to play, there are some brokerages who have recommended some power companies on the argument that a lot of activity has already gone into clean up the mess and perhaps the worst is over, is that a thought you would share? Would you start buying into the crisis that has befallen in so many of these companies? How would you be placed on banks because there is a package apparently coming out for discoms and what they owe the banks?

A: The way our portfolios are constructed, we have a bias towards quality. In that context, I do not see the macro environment having changed that significantly to change our bias away from quality.

There does not seem to be any signs yet that the investment cycle has kicked-in and kicked-in in a meaningful manner. We continue to be overweight on financials; consumers and IT.

Q: What are your thoughts with regards to defensive space because we have seen ITC come back in flavour after that 6% fall in the previous session, just give us a sense in terms of allocation within the defensives, how much would you possibly attribute or how much would you allocate within an equity portfolio of 100%?

A: We are not very fussed about this whole terminology of defensives and aggressives. Many of these companies are growing very strongly in the vicinity of 25%.Many of them have very high ROE numbers, they are pretty much zero debt sort of companies.

In an environment where the consumer cycle continues to be very strong, our focus should be in these sectors and that is exactly the thing that we are playing.

Q: How would you look at the macroeconomic scenario in terms of what to expect from the RBI, would you price in a cut in 2012 itself, would you price in a cut on October 30?

A: We are playing the probabilities as far as the policy action is concerned. What we are saying is that the risk reward is in favour of being long bonds. The cut will come at some point in time whether it is in October or in the next credit policy thereafter. The next move of the RBI is down.

If you play that theme then you are not worried about the cut is going to come in October or December. We are quite happy to hold long bonds, the accrual is in our favour and the curve is reasonably steep for us to take on that risk. That is how our portfolios are positioned on the fixed income side.

Q: For the rupee we have pretty much been ranged bound between 54 and 55 odd mark, any thoughts with regards to the new trading band that we could expect for the rupee or where we could end it December 2012 with levels?

A: On one side, we have seen a significant depreciation of the rupee. What most participants, players and corporates are looking for is some sort of stability in this vicinity of around 55/USD. If we get that, most people will be quite happy.

On the other side, if oil comes off or if we see a meaningful depreciation of the dollar globally, the RBI should come in and buy dollars and ensure that the rupee does not appreciate too much from here. As long as the rupee is within a band with a pivot around 55/USD, I think all participants should be happy.

Q: You don’t think banks have turned the corner, you think they have been adequately punished for the economic slowdown and therefore the rise in NPLs they will suffer, would you be a buyer in public sector banks?

A: The valuations on the public sector side are quite tempting, but that is not an area that we are completely confident of getting into. Our bias has always been on the private banks. We continue to favour private banks.

They have been much more nimble in managing NPLs and the interest rate cycle. That gives us confidence to be happy long-term shareholders in private banks.

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