“Debt levels have been consistently coming down”

Specific sectors and specific companies have been repaying debt and emerging stronger, says Anil Sarin, CIO, Global Asset Management, Edelweiss. Infrastructure companies especially stand to benefit from lower interest rates, he adds. Edited excerpts from an interview:

Do you see the vulnerability of our market to FII flows lower, compared to what we were before?

India is currently attracting a lot of money – both FII as well FDI. This inflow is also supporting the rupee, which provides further comfort to FIIs. However, if there were a concerted withdrawal of FII money for any reason, Indian markets would not remain immune. Despite that risk Indian investors are embracing equity markets with enthusiasm – partly caused by declining returns from debt instruments and partly by poor returns from real estate. As such, the outlook for equity markets remains buoyant.

In your mid-cap picks, how do you manage the liquidity risk?

We try to balance earnings strength with liquidity risk. As long as earnings are expected to be strong, liquidity keeps improving gradually. Every once in a while, we discover we’ve made a mistake. At that stage, we are quick to book our losses so as to free up resources for more productive investments. We also watch the residual return potential of our stocks. If we feel the stock price is getting far ahead of its fundamentals, we book profits and look for alternative investments.

 What are the debt levels of Indian companies compared to earlier years?

Debt levels have been consistently coming down, though it appears otherwise. This is because the largest lenders are also the most unable to repay debt due to a variety of factors. But within that overall scenario, specific sectors and specific companies have been repaying debt and emerging stronger. This is borne out by the trend of credit rating upgrade and downgrade data. Lower interest rates have a disproportionate impact on highly levered companies. Most asset-owning infrastructure companies stand to benefit strongly from a drop in interest rates. This will have a consequent impact on their credit ratings.

Edelweiss has been moving away from a quant-based investment strategy. Are there challenges in following such strategies in the Indian market?

Quant-based investments work very well in large-cap portfolios. This approach allows investors to mitigate volatility in their portfolios. However, for smaller cap funds, we use traditional fundamentals-based approach.

Is fund size a factor in its performance?

We agree that fund size beyond a point starts impacting performance adversely. However, we do not believe fund sizes have reached a point in India where they are ‘too big’.