WF: 2018 has been a huge rollercoaster ride for debt markets, with event-led volatility coming as icing on an already tumultuous cake! What are some of the biggest lessons Mr. Market has taught us in 2018?

Sivakumar: 2018 has been a yoyo year in debt markets. From a clamour for rate hikes to a whisper of rate cuts, the markets have seen a large move in both directions over the course of the year. The year was also an eventful one for debt market participants. From the flip flop on policy action to the spat between the RBI & the government to the IL&FS default (pegged as India’s so-called Lehman moment) and the risk of contagion in the NBFC space, the year has been an eventful one.

In all this the market has reminded investors that complacency can be dangerous. Debt just like other market linked products needs active management and hence retail investors taking the plunge into debt markets should consider mutual funds. On a positive note, a long term trend comparison between equity and debt highlights the opportunities of debt as an asset class and investor portfolio should factor in a meaningful allocation to debt.

Despite 2018 being a year of negatives, the bond market outperformed equity markets for the year. 2019 is likely to be a year of reversals, furthering the investment case for debt markets.

WF: Is the old jingle “happy days are here again” now applicable for bond markets in 2019? What is your outlook for bond markets for 2019?

Sivakumar: We do not believe that there is a material risk of financial instability and hence the RBI is likely to continue to focus on inflation trajectory. With the current inflation trajectory and RBIs inflation projection for the year at 4%, we don't see significant moves on the repo rate front for the rest of the financial year.

As the shadow of the IL&FS saga and the NBFC liquidity crunch recede, 2019 is likely to be a better year for debt against the backdrop of lower crude and stable macros. However, the fiscal position is likely to remain an overhang given that current GST collections are far lower than budgeted expectations and non-tax revenue growth continues to remain tepid.

Currently, the short end of the curve offers significant opportunities from investment perspective as markets are pricing in more than 1 hike till March 2019. Corporate bonds in the 1-3-year space currently trade at a premium of 200 bps over the operative rate which we believe offers material opportunities and hence prefer this space.

WF: How has your strategy evolved through the gyrations of 2018 and what is your overarching strategy on duration and credit as we begin 2019?

Sivakumar: At Axis MF, investment process has played a critical role across funds and market periods. We follow a two pronged process that consists of evaluating interest rate risk and credit risk. As active debt fund managers our investment style is geared to exploit opportunities reflecting our core investment ideas at all times. This has not changed even in times of uncertainty and we have been rewarded for our conviction.

On the credit front we have remained cautious while focusing on building a liquid portfolio so as to minimize the risk while capturing opportunities available from time to time. Our investment strategy and focus have been instrumental in avoiding ‘landmines’ in an environment of market uncertainty like we saw in 2018. Despite market events our funds have remained consistent performers relative to peers across the year.

We see 2019 as a year of opportunities across the credit spectrum especially at the shorter end of the curve. While our investment process keeps us grounded to our core philosophy, selective credit picking with effective emphasis on covenants will be the name of the game going forward.

WF: Many experts were of the view that duration funds are not for retail investors. After IL&FS and its impact on credit risk funds, some questions are being raised about suitability of credit risk funds too, for retail investors. What is your view on these concerns?

Sivakumar: The year gone by has not been kind to duration funds given the current macro-economic environment and concerns over a wide variety of geo-political and external events affecting long bonds. The current fall in longer dated G-Sec’s has been led by RBI’s OMO’s and the market pricing in rate cuts in the foreseeable future.

Given the current inflation environment and the possibility of retracement on account of low base effects and food inflation, rate cuts may remain elusive in the near term, in our opinion. Fiscal concerns continue to remain elevated given the likely shortfall in GST collections and welfare initiatives initiated by the government in the build up to national elections. We believe the culmination of these factors will likely limit opportunities in the long bonds space.

We believe rates will remain stable in the medium term and hence reiterate our positive stance on the shorter end of the curve. Currently, the curve offers significant opportunities from an investment perspective as credit spreads and carry remains attractive. Corporate bonds in the 1-3-year space across the AAA and AA spectrum offer significant risk reward opportunities and thus form a significant part of our portfolios today.

Retail investors have been caught unawares, as they focused on higher returns without factoring the element of risk. The element of complacency discussed earlier has played a major factor this year given all that has happened. Selecting the right fund on the basis of risk appetite is of paramount essence especially in credit fund. The role of the distributor is imperative in advising clients in such circumstances.

WF: For retail investors, what debt product categories would you recommend distributors to focus on and how ideally should these be positioned?

Sivakumar: As mentioned above, currently, the short end of the curve offers significant opportunities from investment perspective as markets are pricing in more than 1 hike till March 2019. Corporate bonds in the 1-3-year space currently trade at a premium which we believe offers material opportunities and hence prefer this space. Short term debt products across low duration, corporate bond funds, and credit funds are ideal mutual fund categories for investors.

Disclaimer

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC 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. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC) Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.

Information set out above is included for general information purposes only and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws as certified by the mutual funds consultant. Any action taken by you on the basis of the information contained herein is your responsibility alone. Axis Mutual Fund will not be liable in any manner for the consequences of such action taken by you. The information contained herein is not intended as an offer or solicitation for the purchase and sales of any schemes of Axis Mutual Fund.

Stock(s) / Issuer(s)/ Top stocks mentioned above are for illustration purpose and should not be construed as recommendation.

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