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    Mid-caps will perform when cost of funding comes down: Saibal Ghosh, Aegon Life

    Synopsis

    We have been trying to keep our overall portfolio less volatile till elections. says Aegon Life CIO.

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    Yields on long-term bonds will fall only if there are deeper interest rate cuts and liquidity infusion by the Reserve Bank of India along with uncompromising fiscal discipline by the government, said Saibal Ghosh, chief investment officer of Aegon Life. In an interview with Nishanth Vasudevan, Ghosh spoke about the ongoing stress in the bond market and outlook for mid-cap shares among other issues.

    Edited excerpts:


    The RBI recently cut interest rates and the latest inflation reading is also benign but the long bond yield seems to be indifferent to the prospect of lower interest rates. What is your reading?

    The shorter-end of the curve has moved but long bond has not reacted. Apart from the central government’s fiscal slippage concerns, there are two other factors which may be attributed to this stubborn long bond yield. One is the less talked about sates’ fiscal slippage. Today, states are collectively spending more than the Centre and their slippages are increasing rapidly. After the 14th Finance Commission recommendations, almost all states have now opted out from borrowing through NSSF and around 80% of their fiscal deficits are getting funded by market borrowings. Barring a few of the recent ones, all these issuances have been in 10 year maturity bucket. And the SDL issuances have been growing at an average of 21% in last four years. This huge sub-sovereign supply is also putting pressure on corporate bond spread as well as on the belly of the yield curve. The second factor is that more than 40% of the government securities issuances in India is in 10 years or above maturity bucket as against just around less than 10% in the US where long bond market is extremely mature. I think we need deeper rate cuts, durable liquidity infusion — may be through CRR cuts, uncompromising fiscal discipline, and some maturity adjustments in supply to meaningfully and sustainably move the long bond yield downwards.

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    Many mid-cap shares appear to be in a bear market. Is the worst over there?

    The mid-caps will start performing as and when cost of fund for doing business comes down meaningfully from the current level. Given the current cost of fund for doing business, only a handful number of midcap companies will be adding economic values to their business in next 2-3 years. It is difficult to justify buying a business that makes less ROCE (return on capital employed) than their cost of fund. But, over longer run I am optimistic on mid-caps. Unlike large caps, this segment of the market represents India growth story much more strongly. Despite recent correction, the midcap index has substantially outperformed the large-cap index on a 5 years or 10 years scale. As long as India is going to grow faster than rest of the globe, I do not see any reason why mid-caps should not outperform in the longer run.

    What is your assessment of the issues in the bond market? There has been a lot of stress of late in the bond market of late.

    If mandate permits there is nothing wrong in lending against pledge of shares or mortgage of property. This time the problem is complicated because NBFCs and MFs filled up this space vacated by PSBs and a few large private sector banks which were grappling with their NPA issues in last few years. Given the less refinancing capabilities and less sticky nature of the liability side of these entities than that of a bank, the market is nervous that in the event of actual default by the borrower the flexibility to restructure and refinance the loan would be limited and there would be a hard landing. Let us hope that the problem is limited only to a few names that is in public domain.

    How should investors allocate their assets now?

    If the investable surplus is for long term, I will recommend equity. Equity as an asset class has convincingly outperformed inflation in past.

    In stocks, where are you allocating money? Some in the market think the consumption story may be over for now.

    We have been trying to keep our overall portfolio less volatile till elections. However, historically we have seen that over longer run it does not matter who runs the government as long as it adopts developmental policies. The big picture is that massive reforms have been implemented in last few years and it will have a significant impact on growth over longer run. We are positive on banks, industrials, power and some pockets in consumption space. Consumption is the biggest part of the economy and it has great potential to grow rapidly.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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