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BW Businessworld

'Good Levels To Enter Equities For Long Term'

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Not too long ago, fund managers didn't talk about macroeconomic issues; most focus on stock market liquidity, net asset values and the Sensex (or the Nifty Fifty), not interest rates, the fiscal deficit or global economic crises. But increasingly, fund mangers have started looking at interest rates, credit market conditions and levels of public debt, in an attempt to better understand what drives capital flows into different asset classes.

Take food inflation, for instance. Though it moved above 10 per cent for the week ended 6 October, Suyash Choudhary, Head-Fixed Income at IDFC Mutual Fund, feels 25th October would be the last time Reserve Bank of India would hike rates by quarter per cent and eventually pause following the slowdown in the economic activity. Talking to Businessworld's Mahesh Nayak he personally favours investing his moolahs in equities as he sees these are good levels to enter equities for the long term. While he sees short-end rates having peaked, his funds are investing in corporate bond with maturity of 1-3 years.
Excerpts from the conversation:
What are you expecting from Reserve Bank of India's (RBI) monetary policy on the 25 October 2011? And why?
We are assigning an even possibility of a pause or a 25 bps hike. The RBI has been concerned with inflation remaining sticky at elevated levels. While momentum on inflation seems to be weakening, the print is still expected to be above 9 per cent for the months of October and November. Managing expectation in light of this may prompt another rate hike.
Though on the other hand, there are compulsive reasons to pause. Global uncertainties have picked up further over the last couple of months. Domestic data continues to show that economic activity is slowing down. Finally, the lagged effect of previous rate hikes is yet to fully take hold. Importantly from RBI's stand-point, pausing now may not necessarily mean a reversal of stance. The central bank can make it clear via its communication that it is pausing to assess the effect of previous hikes in context of an uncertain global environment and may resume hiking down the road if inflation dynamics so warrant.
Are we at the fag-end of rate hikes and why?
Yes, in our view we are approaching the end of the tightening cycle. GDP growth this year and next will very likely print below the assessed current trend rate of 8 per cent. This should ensure that demand pressures continue to weaken. As the full effect of previous rate hikes gets felt in economic activity, this phenomenon will become more visible. Additionally, global growth is also facing a period of exceptional uncertainty which is likely to continue into the next year as well. This would tell on domestic growth as well.
Market is expecting the 10-year government securities yield to touch 9 per cent. What is your take on the 10-year G-Sec yields and why?
There have been two triggers for government securities (G-Sec) yields this year. The first was the expected additional bond supply much, if not all, of which has already fructified. This has caused the sharp rise in yields over the past few days. The other trigger is the anticipation of RBI's bond purchase which is very likely to happen before the end of calendar 2011. On its own, banking system liquidity will head towards negative Rs one lakh crore by mid-November or so on account of rise in currency with public. In order to bring it back towards its stated comfort zone of 1 per cent of net demand and time liabilities (NDTL) of banks, the RBI will have to infuse liquidity via purchase of bonds from the market (similar to what happened last year). This should provide some support to bond yields. Hence, even if 10 year G-sec yield were to touch 9 per cent, we do not anticipate that it will remain there for a long period of time.
Near term direction for G-sec yields would depend upon RBI's rate decision on 25th October and the timing of its open market purchase of G-Sec's. However, over the medium term (6 months) we expect yields to be lower than current levels as market starts anticipating change in monetary policy stance towards early next financial year.
Despite the system flooded with liquidity, why are bankers craving for more returns on their money—at least this comes to be seen from the latest RBI auctions. What is your view and why?
With the additional borrowing amount, the net supply (excluding bond maturities) for second half of the year stands at Rs 2.05 lakh crore which is higher than the first half net supply of Rs 1.9 lakh crore. Given that second half is busy season on credit, demand for credit is expected to be higher than first half (though not as much as second half last year, as off take itself is slowing). Hence, banks may not be as keen buyers of government bonds as in the first half of the year, especially also as they have already built up significant excess SLR positions (over and above the mandated 24 per cent of deposits). The same is getting reflected in latest RBI auctions.
In times of uncertainty where will you advice investors to invest? Currently where are you investing your money? And why?
Asset allocation as a principle should serve investors, especially in times of uncertainty. So depending upon the risk profile of the investor, a mix of asset classes should be looked at.
Fixed income and equities are two different asset classes with different risk versus reward profiles. While it is true that often fixed income gets looked at as a ‘defensive' option when one is not investing in equities, we believe that the right approach is to look at each asset class proactively in order to arrive at a desired composite risk versus reward profile on investments.
In line with an endeavour to practice what I preach (!), I am asset allocated across fixed income and equities. At this juncture I am somewhat favouring equities for incremental allocations given that my personal judgement is that these are good levels to enter equities for the long term. This is also in line with the composite risk versus return profile that I am seeking on my investments.
Is the fund house seeing a flow of money in to the fund house? How much of it is coming into fixed income and in which schemes?
Institutional flows into money market funds have stagnated somewhat. This is a function of available investable surpluses with institutional clients. However, flows into other products like the short term fund have picked up significantly as the case for taking some duration risk has become quite compulsive.
As a fund manager how are you managing the money in your portfolio and where are you investing in this market?
We have had a view since March that short end rates have peaked and that the yield curve would incrementally steepen. The basis for the view was that, apart from expected rate hikes and system liquidity deficit, a major trigger for short end rates to rise was a sharp rise in credit to deposit ratio of banks in the last quarter of calendar year 2010. Owing to higher deposit rates since January – March quarter, we found that credit to deposit ratios had stabilised in that quarter and expected them to fall subsequently. We believed this would protect short end rates from rising much further despite incremental rate hikes from the RBI. Hence we have favoured the ‘front end' of the corporate bond curve (1 – 3 years).
In line with our expectation, the yield curve has incrementally steepened. Thus, while the curve was inverted in March, it is almost flat now. We believe that this process will continue in the future as RBI pauses soon on rates and credit demand continues to slow relative to deposit growth. Hence, we remain of the view that the most compulsive trade is that of curve steepening and accordingly continue to favour investments in the 1 – 3 year segment of the corporate bond curve. We see the yield curve will continue to steepen over next year or so.