AMC Speak Rising global yields and inflation are key risks Mahendra Jajoo, Head – Fixed Income, Mirae Asset MF

Mirae Asset is launching its Short Term Fund at a time when rising global yields and rising inflation are nudging advisors to remain cautious and stay at the short end. Mahendra Jajoo discusses the volatile global bond market situation, the road ahead for Indian bonds in the wake of RBI’s recent monetary policy statement and how he intends positioning Mirae Asset’s new Short Term Fund in the current market context.

WF: The recent global equity sell off is being attributed to upheavals in US bond markets and fears that a 30+ year bull market there has finally ended. Can you provide us a perspective on what’s happening in the US debt market, why it is impacting global stocks and to what extent might it influence our debt market?

Mahendra: The broad based equities suffered their worst fall in recent times as the investors’ feared that the interest rates are headed higher amid concerns of returning inflation. With US economy consistently reporting low unemployment data, good economic growth and moderate inflation the investor’s fear an overheating global economy could mean a more rapid shift by central banks to rein in stimulus. To boot, Fed has been following a pre announced schedule for shrinking its balance sheet and expectations are that other major central banks may soon follow. US govt has effected a massive tax rate cut and plan huge pump priming of economy further accentuating inflation fear. Fed moving up interest rates would lead to higher borrowing cost for corporates, lower dicounted valautions for equties and rush of investors to invest in US treasuries as they seek high yielding securities with lower risk associated. India has been amongst the largest beneficiaries of the global liquidity overhang and tighter conditions may trigger some reverse of flows. A sharp rise in global oil prices and a slip on fiscal deficit tragtes for 2 years in a row has also added to negative sentiments domestically. As such, it has led to sharp spike in local bond yields.

WF: What are your takeaways from RBI’s recent monetary policy statement and what implications do these have for our debt markets?

Mahendra: Although RBI’s guidance in February policy turned out less hawkish than expected, it pointed out significant upside risk to inflation from various factors like fiscal slippage, second round impact of increased housing allowance, higher food prices and spiralling oil prices. Further MPC reiterated its commitment to keep headline inflation close to 4% on a durable basis. It did though at the same time also highlighted possible mitigating factors like easing of oil prices, subdued capacity utilization and muted real wage growth. In spite of recent adverse developments both on global and domestic fronts, RBI retained the neutral stance indicating there could be an implicit expectation of improvement in macro environment at the margin. We expect bond yields to remain in a narrow range in the near term.

WF: What is your outlook on the short and long ends of the yield curve over the next 12 months?

Mahendra: We expect bond yields to remain largely in current range in near term. In H2FY19, as projected by RBI, if headline inflation slows down and oil prices also come down from current high levels, interest rates may ease somewhat.

WF: What is the rationale for the launch of your short term plan at this stage?

Mahendra: Mirae Asset Mutual Fund wants to cater to the investment needs of the investors across categories and tenures and is still in process of builiding a wider range of offerings on debt side. In this context, we believe this is an appropriate time to launch short term fund as the valuation appear to be fairly cheap even though there could be upside risk associated as the market data unwinds. As such, a relatively low duration fund on the front end of the curve at times of higher short term rates looks like a good proposition.

WF: What will be your investment strategy in your short term plan?

Mahendra: The investment objective of the scheme is to seek to generate returns through an actively managed diversified portfolio of debt and money market instruments with Macaulay duration of the portfolio between 1 year to 3 years. The fund will mainly invest in AAA and AA corporate bonds. The fund may also look for opportunities from credit spreads among the range of available debt & money market instruments. The investment strategy of this scheme aims to optimize risk adjusted returns. The Scheme has a short term duration investment option that provides the flexibility to respond to continuously changing market scenario by managing its portfolio in line with current yield curve.

WF: Where do you see the best opportunities today in the Indian fixed income space?

Mahendra: We look at investing as a matter of asset allocation and investing descipline. Its very difficult and futile to try outguessing the market. Right now the macro enviornment, both domestic and global for fixed income remains challenging. The best approach, in our limited opinion, is to follow a systematic process of asset allocation.

WF: What are the key risks today in the Indian fixed income market?

Mahendra: The key risk to Indian fixed income market is rising inflation, challenging fiscal deficit scenario, high oil prices and rising global yields.

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