Sep 20, 2012, 05.30 PM | Source: CNBC-TV18
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.
Rajiv Anand (more)
Executive Director Retail Banking, Axis Bank |
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.