Trust deficit in the credit market is quite worrying: Saibal Ghosh

The current trust deficit in the credit market is quite worrying, said Saibal Ghosh, chief investment officer, Aegon Life. In an interview with ET, Ghosh spoke about his outlook for equities and portfolio positioning among other issues. Excerpts:

The market has entered a bear phase. How much more do you expect the pain to continue?
The downside risk to projected 5.9-6% GDP growth for FY21 has now considerably increased due to the spread of virus both at the global and the local level. While it would be transitory, corporate earnings will be affected for the next few quarters. But the current trust deficit in credit market is quite worrying and makes the growth path even more blur. Equity market buys growth. If growth remains uncertain, then market is also expected to be volatile.

How are you positioning your portfolio these days?
We are building up a portfolio of strong ESG (environmental, social, and governance) rated companies with healthy and sustainable ROCE which far exceeds their cost of funds to generate long-term economic values for their business. Especially so, when market correction is giving a great opportunity to enter into some of these quality names at attractive valuations. We are in the camp of paying reasonable premium over market valuation to buy stocks with higher future earning visibilities in an uncertain time such as this.

Does RBI have the room to cut rate like what the Fed did?
We are going through an extreme uncertain time on the growth front with heightened risk aversion in credit market. Given the expected decline in future growth rate and the current cost of fund in the economy , not many business entities in midand small-segments are generating sustainable economic values to their business. The negative output gap has widened further and oil prices have fallen to almost half of what they were just ago months back. The LTRO by the RBI against excess SLR of Banks is a welcome move to infuse durable liquidity in the system and transmit the rate cut to real economy . Since RBI is not charging any term premium on three-year lending over one-year lending, it is sending a comforting message that no rate hike in foreseeable future unless there is a nasty surprise on inflation or currency front. The subsequent liquidity infusion measures should also help. However, in an extreme and unprecedented uncertain time such as this, the need of the hour is of very strong signal of non-negotiable commitment to revive growth to restore market confidence . I think the RBI has room to go for deeper rate cuts.

How comfortable is it to buy growth companies such as retail banks and consumer companies at these valuations?
More than growth, we segregate the stocks that have high future earning visibilities due to their underlying fundamental strengths. Higher the macro uncertainties, stronger the willingness of the market to pay premium to buy stocks with high earning visibilities. But then comes a point where it becomes difficult to justify the valuation gap. Contextually, no major equity market in the world has financial sector weightage as high as in India where it is almost two fifth of the equity index. We are extremely cautious on some of the very expensive retail financial names.

Many value stocks such as infrastructure and construction have become even cheaper after the current fall? Does that give you comfort to invest in them?
My feeling is that it is still sometime away. One major overhang has been the real estate sector. While some steps have been taken to address the stalled residential projects in affordable housing sector, but it is still not enough to clear some 1,500-odd residential projects stuck at different stages involving some 4,50,000 flats. Besides, in IBC there are still fresh incremental cases that are getting referred. Unless these overhangs are cleared, it is difficult to expect a trigger in value stocks in construction and infrastructure sectors.

Is the stress in the equity market spreading to the credit market?
Both are inter-linked and any such contagion cannot be ruled out at this stage, especially as regard to loan against pledge of shares. However, even if such a transmission is taking place, it would have a marginal impact on credit stress as credit market was already under tremendous stress much before the recent fall in equity market.