Gopikrishna Shenoy, CIO, SBI Life, says that the current liquidity crisis in NBFCs can be handled by sale of assets to banks. He feels that much of the NPA pain in the banking system is behind us and that interest rates may not soon head north. Excerpts from an e-mail interview:

There has been relentless selling of mid- and small-cap stocks across the board over the past nine months. With steep correction in stock prices and valuations, should investors actively start looking at opportunities in the space?

Since the beginning of this calendar year, with increasing interest rates, rising oil prices and the dollar strengthening, mid-caps have underperformed. There was shuffling by mutual funds on account of regulation change, too (SEBI’s new scheme classification norms). Interest rate risk is not over. We are passing from a phase of interest rate decline and liquidity flush to hike in interest rate and liquidity getting sucked from the market across the globe for the past three years. This is a difficult phase, and, therefore, only select mid-caps can outperform.

There is a lot of concern surrounding the weakness in the rupee and macro factors such as soaring crude prices, and current and fiscal deficits. The NBFC liquidity problem is causing anxiety, too. Are we better off now than in 2013 or 2008? Are these concerns likely to abate soon?

Yes. This time around, the problem is not as big. In 2008, it was a global financial crisis and in 2013, it was the start of withdrawal of liquidity infusion. This year, global liquidity has dried up due to increasing interest rate in the US. Liquidity issues in NBFCs here can be handled. NBFCs that have liquidity problems can sell their retail assets to banks and make good their short-term liquidity-related issues. They may have to sacrifice some growth rate in their loan portfolio going forward. They also need to finely balance the retail and corporate mix hence.

Fall in the rupee as a result of oil and CAD (current account deficit) moving up is not a big concern now. Brent has sharply corrected from $86 per bl (barrel) to $72 per bl in a span of less than 20 trading sessions. CAD — at 2.6 per cent — is, therefore, not likely to move up . In 2013, CAD moved to as high as 4.6 per cent (April-June 2013) on the back of taper tantrum and the rupee weakness. Compared with the high and the low the rupee made against the dollar for 2013 — from ₹54 to a dollar to ₹68— we are in a far better situation today. The rupee has strengthened from 68 since 2013 and weakened only recently.

With interest rates on the rise, are you actively asking investors to take short- and medium-duration debt options? How can investors position themselves from the rising interest rate cycle?

We have short-term and duration funds in our portfolio. Our investors cannot get in or come out as frequently as they can do with an AMC. They can only switch from short-term to duration-related funds. We are not advising for a switch as of now. With inflation under control and not likely to spike up, and oil not showing signs of trouble, we think the risk of interest rate spike is behind us. The yield on 10-year government securities has corrected 40 basis point from its high. We are recommending investors to stay put with their existing investments.

For the second successive quarter, the earnings scorecards of companies in the listed space have been above market expectations and mostly positive. Is the momentum sustainable over the foreseeable future?

Earnings declared so far of Nifty companies have not met expectations, though the revenue and operating-level profits are showing marginal beats. Increase in commodity costs and interest rate will come to bite the companies, and earnings expectations need to be revised downwards for certain sectors. On the other hand, a good part of earnings growth will come from the banking sector for the next six quarters.

Commodities will also contribute. Banking is likely to show an upswing as a large part of recognition of NPAs is behind us. Banking profits form a large part of the benchmark pool. Banking forms more than 25 per cent of the total weight in Nifty today. So the momentum is sustainable, but it is too dependent on a few industries doing well.

Which sectors have valuation comfort and can be considered by investors from a two-year perspective, and which are the ones to be avoided for now?

Consumer discretionary, corporate banking and a few select NBFC stocks have valuation comfort as of now. We are underweight materials and telecom.

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