We are high on duration now in our duration based funds

Alok Sahoo

Head – Fixed Income

Baroda Pioneer AMC

  • Oct 18 crisis is now firmly behind us – the biggest lesson for all is to evaluate companies on the basis of the strength of their own business fundamentals and cash flows rather than strong parentage and credit ratings.
  • RBI may keep rates on hold in 1HY19. G Sec yields likely to trade with softening bias.
  • Fund house is currently high on duration in duration based funds and is adding credit selectively in accrual based funds, without getting aggressive on duration in accrual funds.

WF: Are the liquidity concerns of Oct 18 firmly behind us or are we just experiencing a temporary lull? Many experts tell us that NBFCs and HFCs are not really out of the woods as yet….

Alok: We believe that the liquidity concerns of Oct 18 are over, however now the market is more motivated for investing in better quality NBFC/HFC which have good asset quality. The retail focused NBFCs have better access to the liquidity whereas the NBFCs having wholesale funding and exposure to real estate are finding it difficult to access the market.

WF: Some experts believe that severe curtailment in NBFCs’ ability to lend is going to impact a large number of mid sized businesses, thus opening up the possibility of credit risks in that segment. How real is the issue of credit risk rearing its head again?

Alok: In this liquidity crisis, only few NBFCs/HFCs were impacted. The lending of those NBFCs have been substituted by either Banks or other NBFCs.. We do not see any concern on credit to the better quality mid-size businesses. However, credit to real estate sector has definitely slowed down due to concern for the sector as whole.

WF: What lessons should all stakeholders – fund managers, distributors and investors – learn from the IL&FS issue and its aftermath?

Alok: The key takeaway from IL&FS issue is to evaluate companies on the basis of the strength of its own business fundamental and cash flows rather than the strong parentage and credit ratings.

WF: How are you managing your accrual and duration based strategies now?

Alok: In the December Bi Monthly Monetary policy, the RBI decreased the headline inflation sharply down to 2.7% - 3.2% in H2 of 2018 and 3.8-4.2 in H1 of FY19. Inflation may soften and GDP growth weaken in H2 of FY18, which might be lower than RBI’s projection of 7.2-7.3%. Therefore, RBI may keep the rates on hold till H1 of FY19. Post policy comment from Deputy Governor that “current pace and frequency of OMO purchases may be required till March 19” might comfort the market that the net supply of government securities will be lower. The yield may trade in a softening bias. Since we are positive on the bond market we are high on duration in our duration based products. In accrual based products, we are adding credit selectively and not very aggressive on duration.

WF: Where do you see the best opportunities in the fixed income market and why?

Alok: The government securities are likely to perform well because of higher OMO purchase by RBI. RBI should conduct more OMOs to infuse durable liquidity to the system. The yield is likely to soften due to lower inflation and growth. We expect RBI to change its stance to neutral in its next monetary policy and hold on to the rates in FY 20. Having said that the risk to the market is there due to slippages in fiscal deficit.

WF: What would you advocate as the optimal choice for retail investors among debt funds now?

Alok: Considering the current environment, investors may look to invest in duration based products along with short term accrual and credit funds.

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