BackFurther drop in yields only if repo rate falls below 8%
Amandeep Chopra of UTI AMC shares his thoughts on navigating the current market environment
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At the helm of UTI Asset Management Co. Ltd’s fixed-income strategy is Amandeep Chopra, who says the markets at the moment have priced in all the positive news and it’s difficult to find opportunities in such a situation. He has been with the fund house for 20 years and manages portfolios with a conservative bias without feeling the need to take aggressive duration and credit calls in times of uncertainty. Chopra shares his thoughts on navigating the current market environment.
Do you have a target level for the 10-year government security (G-sec) or would you rather wait for the interest rate cycle to turn?
The way markets are evolving at the moment, it’s difficult to pin down a specific target for the 10-year benchmark G-sec. We prefer to have targets in terms of bands or a range, but that also constantly evolves. The way certain key macro variables are developing means that our estimates need more frequent revisions. Earlier, we held more of a medium- to long-term view. This financial year, we have seen many changes in both the monetary policy and the fiscal policy, which has made the market environment uncertain, albeit with a positive bias.
Right now, the positive influences have already moved the yield lower. The 10-year G-Sec yield has moved to a band of 8.2-8.4%, and that’s our near-term target as well. Why we don’t project a medium-term range anymore is because it’s still evolving. A lot depends on whether the RBI (Reserve Bank of India) will initiate a rate cutting cycle, and when. At the current level, we are comfortable with the 10-year (G-sec) being at a yield of 20-30 basis points or so above the overnight rate. (One basis point is one-hundredth of a percentage). At this level, most of the positives are priced in. Any further drop in yields will happen only if the repo rate falls below 8%. Currently, there are only “expectations" of it falling below 8%. We do not see sufficient reasons for that to happen just yet.
How has foreign institutional investor (FII) participation in the domestic bond market affected your approach?
FIIs have clearly become big in the local fixed-income markets. Their trade volumes have made everybody take notice. We do watch FII flows actively, but this has to be done with a view on global events. We get inputs on global economic conditions and fund flow factors from our counterparts in T Rowe Price (Investment Services Inc.).
India had two things going for it in the recent months; the change in government and the focused central bank. There were some uncertainties in other emerging markets such as Brazil and Russia. While an economy like Indonesia is attractive for an FII, it’s not big enough to absorb large flows. India, on the other hand, had positive news flow and events supporting it.
FIIs are here to stay and our overall strategy reflects that. On the flip side, the increased FII money also presents a risk. If any of the positive trends were to reverse, or there is a risk-off trade, which calls for reduced exposure to emerging markets, bond yields in India could take a hit. The high FII volume means that even on an intraday basis, how much they invest matters.
What are the challenges of managing a corporate bond portfolio?
Often, funds add on securities to benefit from higher yields without much thought given to the potential of downgrades. But this doesn’t always play out. We are very focused on credit appraisals and on not having concentrated bond portfolios. We have internal limits, at fund and fund house levels, around new companies that issue bonds.
We haven’t seen a very long, stretched out interest rate cycle in India yet and, hence, the portfolio should be in a position to liquidate and exit when the fund manager sees the cycle reversing. We only invest in a security if we have a view on the company as we have to live out the investment tenor fully. At the moment, spreads have already compressed for corporate bonds. But we see the corporate bond market becoming more vibrant and bigger as capital expenditure increases.
The demand dynamics for fixed maturity plans (FMPs) has changed in the past few months. Will this segment go out of favour?
The beauty of fixed-income products is that no segment really dies; there is just a re-allocation. If you recall, when incremental taxation was proposed for liquid funds, people thought that category will become unattractive and money will shift to banking products. That didn’t happen; money just shifted to another category. I don’t see FMPs dying out as a category. But, the size of the segment will reduce. Investor behaviour may change slightly with more focus on three-year products, so the category may shrink.
We will be present in the space of one- to five-year FMPs. At present, though, since one-year rates are not attractive, you won’t see too many launches. In a normal market environment, a one-year (or a three-year or a five-year) bond will offer slightly higher yield than a corresponding deposit. For an investor looking beyond tax advantages, FMPs still offer better returns.
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