Selective on midcaps; gas pricing a worry: Birla Sun Life

With market climbing new highs, and stable macro situation, one must stay invested in this market says Sashi Krishnan, CIO, Birla Sun Life Insurance. Key indices are trading at all-time highs, while midcap stocks have seen gains of 1 percent in last two days.

Speaking to CNBC-TV18, Krishnan says stability in the macro system is a big relief, although inflation remains a bit of a worry. "That too will ease as rabi crops come in market by December," leading to good recovery in growth. Meanwhile, interest rates appeared to have peaked out and are likely to see a decline in 2015, Krishnan says.Krishnan is comfortable with crude price for now, even expects further dip, but worries about gas pricing issue.

He advises investors to pick midcaps selectively based on earnings and quality of management.

Below is the transcript of Sashi Krishnan’s interview to CNBC-TV18’s Ekta Batra and Anuj SinghalAnuj: Market at all time highs, yesterday domestic institutional investors (DIIs) were net buyers in the market after a long time. What is your call, would you be putting incremental money at work or would you stay tight with your current investments? What is the best way to approach the markets right now?A: We are putting incremental money to work so we don't have too much of cash position. Most of our investment, our tactical asset allocation is towards stock in our equity funds. From a long-term perspective we are still very positive and the signs that we are getting especially we heard the Independence Day speech of the Prime Minister where there was tremendous emphasis on ‘Make in India’, the manufacturing sector. This clearly tells us that the focus is now going to move towards a greater emphasis on creating infrastructure, making manufacturing easier and therefore we do think that the long-term outlook continues to be very positive and we would continue to put incremental money to work in the markets. Ekta: Concentrating on your sector allocation within your portfolio which one would get the highest weightage at this point in time and which one would see the lowest weightage?A: If you ask me what is it that we like at this point in time, we continue to like the banking and the financial sector, we continue to like the oil and gas space. We have been investing into the oil and gas space for quite sometime because we have been saying that with incremental reforms coming in the space and crude remaining where it is, inspite of all the geopolitical tensions, this is a good space to remain invested in. We do think that if the macros improve, interest rates fall and oil prices remain where they are, the auto sector could be one of the gainers over the next couple of days. In the financial sector if you look at the last quarter we did have some problems, slippages didn’t improve very significantly, we did see higher slippages but we think going forward things will improve significantly for this sector and therefore we continue to remain invested. There I would put incremental money to work. Anuj: For last two days midcaps are outperforming but we had a period of big underperformance before that. Do you sense good opportunities in the midcaps or do you think it would be largely a rally which should be driven by large caps and high quality names?A: The midcap index has moved up something like 51 percent year-to-date, it is a big move. More importantly the valuation difference that we had between the large caps and the midcaps has narrowed substantially, if not narrowed it is completely over, there is hardly any difference. Therefore the strategy that we have in midcaps is now very selective, it is not go out and buy any midcaps, it is clearly look for earnings visibility, look for good quality management and try and invest into those kind of stocks. We would be very selective in our midcap strategy. It is not even a sector approach that we are taking, we are basically trying to look at identifying good quality stocks and get into those and remain invested over there. Ekta: You wouldn’t be worried about asset quality concerns with the reemergence of issues such as Bhushan Steel which will now show up may be on the balance sheets of PSU banks in the coming quarters. Asset quality is not a big worry for you when you have such a high sector allocation to financials?A: We wouldn’t be completely sanguine on that but we do think that as we go into the rest of the year may be by March 2015 we will see interest rates falling. With interest rates falling what tends to happen is that a lot of the slippages tend to ease out quite a bit. Therefore while we are concerned about the fact that there are asset quality problems with at least some of the government owned banks, most definitely, we think that it is more or less peaked out and from here on things should only get better. It is not that we are just looking at some of the private banks, we also do think that in some of the public banks things will start improving from the quarters going forward.