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WF: How should we interpret RBI's recent guidance on lowering the target real neutral rate to 1.25%? Is this a signal on easing the predominant focus on inflation targeting?
Sujoy: The RBI has stated that since global real rates have declined and slowdown in growth domestic neutral real interest rates can be lowered to the 1.25-1.5% range. Given India's partially open capital account, global rates are important drivers of domestic rates. The governor's reiteration of the fact that the medium term target of inflation is in range and the RBI's attempt at supporting domestic growth in the backdrop of anaemic global growth, in some sense, seems to have pushed back the urgency of reaching CPI target of 4% at this point in time.
But having said that, it may be noted that the RBI has not taken its focus off inflation completely. It recognises that there continues to be an upside risk to inflation, but it has changed its stance to be more supportive of growth. Given the low inflation and low growth environment globally, India's macros also do get affected due to international trade. The effect of low inflation globally is seeping into domestic headline inflation too.
WF: Is there scope for yields to come down further over the next 12-18 months or are we now pretty much at the end of the rate cut cycle?
Sujoy: We believe that achieving the inflation target of 4% in 2 years' time remains a possibility amidst moderating domestic inflation, lower food and energy inflation and low price pressures in global markets and therefore we expect the repo rate to drop further lower towards 5-5.50% in 2 years' time frame. Given this background there is scope for yields to come down further
WF: Is there merit in staying invested in duration funds now or should one be shifting to dynamic bond funds to get better value in this market?
Sujoy: While we believe that inflation would continue to remain benign in the course of time, there are certain external risks that could impact us. These being,.
Volatility in currency market due to altering global scenario and US rates. Fed hiking rates in the absence of inflation Volatility in flows as global liquidity moves from lower yielding assets to higher yielding assets Threat from Chinese exports and altering trade balance due to overcapacity in China.
While the impact of the mentioned risks on us would be in varying degrees, we believe that this warrants cautiousness and therefore would suggest investors to shift to dynamic bond funds
WF: How do you see interest rates and inflation shaping up over the next 12-18 months and what do you see as the key drivers for our fixed income market going forward?
Sujoy: Global growth continues to be weak and further there are concerns pertaining to overcapacity across the manufacturing units in China and other parts of the globe. In this backdrop, we expect inflation in the developed economies to continue to remain muted. In India, the growth momentum is unlikely to improve significantly in the near-term to warrant caution about demand-pull inflation. A positive inflation path, however, needs to be weighed with global uncertainties ahead. This includes banking sector worries in the Europe, the upcoming referendum in Italy, the US Presidential elections in November, an OPEC meeting later that month and the likelihood of US Fed rate normalization in December.
Globally interest rates, which are at near zero levels, would require a substantial change in the underlying growth to warrant a rise. With continued Quantitative Easing (QE) measures by the major central banks, low interest rates are here to stay for a while.
Apart from global growth and inflation some of the key domestic drivers to watch out for in our fixed income market would be related to our macroeconomic fundamentals
Lower Current Account Deficit (CAD) - possibility of turning marginal positive in near months Lower fiscal deficit - further consolidation possible Level of forex reserves - presently over 12 months of import cover Lower headline inflation - good monsoon leading to higher production and moderation in food prices Cleaning up of the bank balance sheets Moderation in trade deficit - drop in import bill due to moderation in crude oil prices. Oil fundamentals suggest stabilization of prices around current levels with occasional volatility. Overall demand for oil remains lower than supply. Higher inventory of oil in US and China to maintain a lid on prices. This would aid in keeping inflation benign RBI's decision to neutralize the deficit liquidity position within the banking system through Open Market Operations (OMO) and Forex intervention, leading to an increased risk appetite among investors. This will also help in transmission of lower rates The extent of the cleanup of the balance sheets of banks as this would have a bearing on their ability to start lending to the corporate sector as against investing in G-Sec and superior rated corporate bonds
WF: Within income funds, you have an Active Income Fund, a Corporate Bond Fund and a Credit Opportunities Fund. Can you take us through the positioning of each of these funds, their portfolio strategies and the key investment argument now for each of these funds?
Sujoy: Invesco India Active Income Fund - The fund seeks to generate optimal returns while maintaining liquidity through active management of the portfolio by investing in debt and money market instruments. As the portfolio of the scheme will be actively managed, the Scheme may have a high turnover in order to achieve the investment objective. The scheme constantly monitors the interest rate movements by keeping a close watch on various parameters of the economy. It has discretion to take aggressive interest rate/duration risk calls and allocate assets accordingly1.
Invesco India Corporate Bond Opportunities fund - The Scheme endeavors to generate returns and capital appreciation by predominantly investing in corporate debt securities of varying maturities across the credit spectrum. The Scheme endeavors to take benefit of superior yields by taking credit risk. The Scheme will invest only in debt instruments which are issued by a corporate whose debt programme is rated as 'investment grade' by a credit rating agency. The scheme shall not invest in government securities and State Development Loans but may invest in T-Bills, Repo & CBLO up to the limit stated in the asset allocation pattern. The fund will maintain portfolio duration between 24-36 months1.
Investors seeking a strategy that will generate high accrual, steady stream of income while attempting to gain from credit spread contraction, credit upgrade and investments in first time issuers with a superior balance sheets, should consider investing in this fund.
Invesco India Credit Opportunities Fund - The fund is a short-term debt offering, which focuses on outperforming its benchmark by investing in instruments that offer superior yields at acceptable levels of risk. It aims to generate alpha (excess returns) for its investors, through strategies that involve taking active positions across the credit curve. The fund will maintain an average maturity between 30-45 days1.
It provides an ideal diversification tool to the investors looking out for minimal volatility in their investments with returns better than a liquid fund, with a time horizon of at least 1 month.
1The product positioning and current duration is based on current view and is subject to change from time to time.
WF: What is the Invesco house view on the global bond markets, which many experts are calling a huge bubble that could implode any time?
Sujoy: The global policy response since the financial crisis of 2008 has been massive and unrelenting. Central banks of developed countries pumped trillions of cash into financial markets to revive growth. While the US Federal Reserve has (at least for now) ceased its quantitative easing (QE) operations, it has struggled to return interest rates back to normal levels or reduce its balance sheet back to its former size. Japan has maintained QE at approximately 15% of its GDP for some time, and hinted that it may escalate it in the near future. While the European Central Bank (ECB) has indicated a slowdown and eventual withdrawal of its stimulus program since there isn't any sign of any improvement on the ground, we don't expect that to happen soon.
While investors disagree with the policies of central banks they recognize the vast power that they wield. For the world to return to market pricing of bonds, there has to be a catalyst. The power of the central banks must be more than offset by a fundamental change, or a political wave to change it.
Until that happens, investors will have to live with negative yields driven by the ocean of liquidity under low price pressures or absence of positive inflation and subnormal growth.
Disclaimer:
This document contains views expressed by Mr. Sujoy Das, Head - Fixed Income, Invesco Asset Management (India) Pvt. Ltd. on fixed income markets. The views and opinions contained herein are for information purposes only and should not be construed as an investment advice or recommendation to any party and / or solicitation to buy, sell or hold any security or to adopt any investment strategy.
This document alone is not sufficient and shouldn't be used for the development or implementation of an investment strategy. All figures and data included in this document are as on date and are subject to change without notice. The statements contained herein may include statements of future expectations and other forward looking statements that are based on prevailing market conditions / various other factors and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. The data used in this document is obtained by Invesco Asset Management (India) Pvt. Ltd. from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Invesco Asset Management (India) Pvt. Ltd. does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The content of this document is intended solely for the use of the addressee. If you are not the addressee or the person responsible for delivering it to the addressee, any disclosure, copying, distribution or any action taken or omitted to be taken in reliance on it is prohibited and may be unlawful. The readers should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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