Any positive data from US may worry India: IDFC MF

The 10-year bond yields on Friday rose to 8.99 percent following strong US treasury yields boosted by the better-than-expected US jobs data which may allow Federal Reserve to pullback its monetary stimulus shortly. The rise in bond yields is a worry as it will force financial institutions to hike their lending rates, reflecting higher cost of funds in the system, in turn pushing up interest rates on all kinds of loans.

Also Read: India not to be affected much by Fed taper: Deutsche

Speaking to CNBC-TV18, Kenneth Andrade, head investment, IDFC Mutual Fund says the issue of bond yields is just one part of the problem which is putting up a near-term pressure, but the bigger worry is the macro-environment which is yet to show signs of recovery. Only companies earning revenues in dollars will do well, he adds. He believes that any positive data from the US will be bad news for India's financial markets in the short term due to rupee weakness. Below is the verbatim transcript of Kenneth Andrade’s interview on CNBC-TV18 Q: How much would this bond yield bother you? Would it unleash fresh selling in Bank Nifty and where are you expecting this yield to stabilise?
A: The bond yields are one part of the entire problem that this economy has and while it is putting up near term pressure on the environment, the environment is far from recovery or rehabilitation.
Apart from bond yields banks from an economic standpoint as well, while we will continue to get gross domestic product (GDP) growth numbers between 4-5 percent, earnings will do well only for companies that are exposed to the dollar or higher dollar incomes. I think that is where the market is at this point in time. So, bond yields, forex is a large macro trade and any positive data flowing from the western world will lead to a lot of pressure on the macro environment as far as India is concerned.

Q: How are you approaching the entire banking space now? We had a couple of shockers in the form of Punjab National Bank (PNB), in terms of numbers. Would you be concerned about this space or would you use every dip to accumulate in the banks?
A: That’s been in continuation now for almost 18 months to two years and you have seen a lot of stress as far as the public sector companies are concerned. This has not shown up on private sector banks.
We all work in the same economy, all these companies are working in the same economy and when you come out of an economic upstream or when you are trying to base out an economy, the entire pressure is felt by the banking system or the financial system. So, this is a space which will see pressure in continuation and over a period of time it will be across the entire board. So from a standpoint of the financials, the economy has to get back on track and once the economy gets back on track, these companies have some visibility on the asset side of the entire book and once you get there then that is the time they will be able to restructure or rehabilitate themselves.
There is some time away from that. As far as the financials are concerned, we are not jumping in with both our feet; we are looking at it on a very company specific basis; valuations maybe a wrong matrix to look at because they are cheap but there is nothing to say that they haven’t got cheaper in the past. Q: Do you think both global and domestic trends are now shaping up to take the index below 6,000? At the moment would you be wary of buying?
A: At an all-time high in the index, I wouldn’t say that market is cheap given where we are as an economy. Also, if you meet individual companies on the ground, they have had two-three year window till date to recalibrate themselves to the current environment and a number of companies recalibrated themselves in the current environment. So, incrementally you are seeing more and more companies in any form and spectrum of business wanting to have a higher income from exports.
Second, every single company has gone into deep freeze and capex. So, there is no capex happening on the ground and that effectively means that balance sheets over the next couple of years will need to shrink and the focus is completely on cash flows and the repayment of debt. So, companies have responded to the environment. It is a matter of time, when the economy bounces back, these companies will follow suit.
Companies are responding, they are creating a balance sheet, they are not spending in excess today because tomorrow the environment is uncertain. But if the environment comes back, they have a balance sheet to grow in that system. Looking at the index from a 6,000 point of view; I do not think it’s cheap, I do not think it’s very expensive but there are pockets of environment that have done extremely well in the past.
This market will continue to chase companies which are solvent and are doing well and as an investor we are averse to buying significant amount of leverage in the entire system. So, we are not trying to pick the bottom of the economy, we do no think companies with significantly high debt or on the investment cycle are going to do extremely well. We rather pay a price for solvent businesses and over a period of time we hope that these companies will respond if the economy bounces back.