If you have 1-yr horizon, stock to FDs: Lakshmi Iyer

Lakshmi Iyer, President & CEO, Investment Advisory. Kotak Investment Advisors, says “I think it is going to be a period of wait and watch. Yields will continue to gyrate. We have seen one of the highest volatilities as far as developed market yields are concerned. It is extremely whipsawed and therefore, with such pace of fast movement, it is but natural to see some sort of a consolidation in the weeks ahead.”

Let us decode the current trend of US bond yields and also the kind of data that we are seeing that is coming up from the US market, which is better than expected, but somehow again not signalling a rate cut scenario. How would you understand and explain this to our viewers?

A couple of things, very interesting from a trend perspective that we can see in the US. For starters, obviously the latest job data which is worth focusing on has come in softer than expected. That has obviously accentuated the market view that the US Fed may take a softer stance. The US federal governor for quite some time has been speaking about higher for longer but might have to probably now take a softer stance. That is number one.

Unlock Leadership Excellence with a Range of CXO Courses

Offering College Course Website
IIM Kozhikode IIMK Chief Product Officer Programme Visit
IIM Lucknow IIML Chief Executive Officer Programme Visit
Indian School of Business ISB Chief Technology Officer Visit

In line with that, we saw the FOMC also go in for a pause. Now, that pause does not mean that there is no rate hike but it looks like incremental data that is coming out of the US is not really indicating any rush to hike rates. So that is a positive narrative coming out from the US and with inflation being largely under control, though still outside the Fed band, this is positive news from a bond market perspective globally.

But don’t you think the bond market also somehow has cooled off from 5 to 4.5%? What is the trajectory or the range in which you think it will be moving? Do you think consumption and spending could be a concern going ahead for the US in terms of numbers and data?

On your first part, the pace at which the yields have moved, obviously, is quite astounding north of 5.1% to south of 4.6% in such a short span of time. Trajectory is something which we had anticipated. The pace is definitely a little bit baffling. So it probably could take a little bit of a breather before it starts its southward journey because we need to keep in mind that the Fed has not departed from its higher for longer kind of a stance, though they have obviously indicated a pause. So I think that is one thing.

The consumption trends are fairly mixed. The US has been one of the stronger performing markets. So it is completely a mixed bag where one set of data points, jobs, for example, is showing very heightened uptick or improvement barring the last week’s data. And of course, housing data is clearly showing that higher rates are hitting. So it is a mixed sort of a bag.

There is Thanksgiving, there is Christmas, all of these will lift the consumption mood in the US, which does not seem to be very sombre.

You were talking about the mixed bag data that is also coming in the coming months. The concerns that you also raised still persists as far as the U.S. economy is concerned.

That is correct. So therefore, I think it is going to be a period of wait and watch. Yields will continue to gyrate. We have seen one of the highest volatilities as far as developed market yields are concerned. It is extremely whipsawed and therefore, with such pace of fast movement, it is but natural to see some sort of a consolidation in the weeks ahead.

In the Indian context, I want you to help us understand the inflation trend which so far looks really comfortable as far as the RBI bandwidth is concerned. Also, this festival of elections is coming and a lot of freebies have been given. Talking about that in context of the fiscal deficit and also the food subsidy, how much of it is a concern for you and what are the factors RBI might want to consider for if not a rate cut but a longer rate pause?

So, if you look at India’s macro data whether it is on the inflation front – of course, crude oil keeps oscillating but that also does not seem to be a big concern. Trajectory-wise, the anticipated food price cooling has clearly seen the trajectory of headline CPI head in the downward direction. So, we are on a path to achieving a lower inflation in the coming few months. I do not think the fiscal deficit is a market worry. We seem to be on the path of decline. There is, of course, reasonably good supply of government bonds, but there is decent enough demand including the longer end of the bond curve.

So, even if there are going to be elections, we know we have the state elections and then the general elections and usually in such periods the currency in circulation which means the money from the bank tijori actually moves into the ghar ki tijori that usually is a trend, but that is not going to be ominous enough to lead to a fiscal slippage.

So, that does not seem to be a market concern right now. We need to see going forward whether bond yields continue their downward move in the US. How long will India remain where it is because when yields were on the way up, India did not participate as much, obviously therefore on the way down India is not participating as much.

The key driver I think for the markets in India is going to be if RBI opens market bond sales. I think that is something which they spoke about in the monetary policy. If they announce sometime next month or this month, it could be a small little party pooper but beside that macro, we are pretty stable.

One thing we wanted to understand from you about the Government of India 50 years bond is how attractive do you think they are?

The 50-year bond is good for terminal benefit funds, insurance companies, pension funds which really look at locking-in their long-term sort of commitments. It does make a lot of sense. Also, for those investors who are looking at sovereign bond exposures, I think this is the time to add some duration. So, if you are looking at a buy and hold kind of a strategy and hoping for some capital gains in the months ahead, it is a great opportunity to participate in the 50-year bond and just run with it because it is a sovereign credit and, of course, you get a higher yield because of the longer maturity. So, it is an okay strategy to own at the current juncture.

So far looking at the interest rate trajectory, would you recommend long-term parking in debt mutual funds or do you think at the current rate, fixed deposits or even small savings schemes look very attractive? So if you have a short to medium time horizon you can really park your money there?

Yes, if your horizons are extremely short, say one-year types, then you are better off doing bank fixed deposits looking at the pace of deposit growth, they do not really cut the deposit rates as much and you could go for that. Arbitrage funds for one year and below are a great bet. They are quasi look alike and feel alike in terms of debt instruments. But yes, if you are looking at horizons of beyond two years, two to three years or four years, that kind of a horizon within the fixed income space, we are going to oscillate very near term in the band of 7.25% to 7.4-7.45%. As the yields are guided towards the upper band, it is okay to have a duration around the four- to five-year bucket with a combination of mutual fund schemes and/or good quality corporate bonds combined in your portfolio.

Is it time to diversify your fixed income portfolio? Or is it time for you to stay more towards equity? Obviously a lot depends on financial planning, on the current state of the portfolio, risk appetite amd understanding of investment instruments, but is any reshuffling or revamping of fixed income portfolio or that part of your portfolio recommended?

So, two parts to this, if you are looking at growth capital, that money has to go only and only into equities but with a minimum at least like a 1000-1200-day kind of a horizon, a three-year tops kind of a horizon. For every other category of investments within fixed income also, you can look at a combination of sovereigns and you can add some credit risk in your portfolio given where we are on the interest rate scenario and the macroeconomic cycle.

The bank NPAs are at a seven-year low. So, this is a time where your fixed income portfolio can assume a little bit of credit risk in the form of funds or in the form of bonds as the case may be. Why am I using both in conjunction? Because taxation-wise it is pretty much similar. So, within your fixed income portfolio, you can also look at a combination of hybrid funds because they are good in augmenting your fixed income returns and at the same time, risk reward is tilted on a more balanced note. Sothese are the kind of strategies you can look at as an alternative to fixed income as well.

Roy Walsh

Related post