Mr. Kaustubh Gupta
Co-Head Fixed Income, Aditya Birla Sun Life AMC Limited
Mr. Kaustubh Gupta is the Co-Head of Fixed Income at Aditya Birla Sun Life AMC Limited (ABSLAMC). Kaustubh brings with him 17 years of extensive investment experience having worked in various capacity of treasury finance, liquidity management and fund management. As Co-Head, Kaustubh leads the overall fixed income portfolio management. Prior to joining ABSLAMC in 2009, Kaustubh worked with ICICI Bank for 5 year in the Asset Liability Management team.
Kaustubh is a Chartered Account and CFA (Level 2) by qualification.
Q1. What is your debt market outlook for 2023?
While we have spent most of 2022 in assessing the terminal policy rates, this would undergo a change in this year as we will start with already restrictive policy territory, tightening liquidity, and fag end of the rate hike cycle. Central bankers are likely to pause soon but sufficient conditions for policy easing are unlikely in 2023. To sum up, Slower growth & lower inflation, shrinking liquidity, and higher volatility are likely to dominate the fixed income market.
As of today, liquidity has normalised close to neutral, RBI has hiked operative rates from 3.35% to 6.50%, the growth & inflation matrix have headwinds primarily from the global platform and external financing risks are coming off due to lower commodity prices. The nominal yield curve up to 3 years is now 300bps higher as compared to last year and on a risk-reward basis fixed income looks like an investible asset class beyond the asset allocation principle. The liquidity situation will dominate local fixed income markets and would require active RBI intervention to support funding needs post June 2023. Demand supply situation from the sovereign curve is balanced and thus we would expect benchmark G-Sec to continue to range between 7.20%-7.60% for 2023. However, because of tighter liquidity conditions and rising credit demand, the term premium on corporate bonds will see pressure. Thus, Accrual is the theme for 2023 on a risk-reward basis.
Q2. What were your expectations from budget 2023 and were they fulfilled?
Before budget we were expecting government to stick to fiscal deficit glide path despite being pre-election budget with more thrust on supporting local growth amid global slow down and minimal tinkering on taxes. This year budget has almost ticked all positives. Thus, we would describe budget as prudent, credible, and focused on financial stability.
Q3. According to mutual fund managers, the fiscal deficit numbers and the government borrowing will have a positive impact on the bond market and the debt mutual funds. What are your views on it?
It’s true that both fiscal and government borrowing are in line with market estimates and bond market are overall comfortable for now. However, fiscal numbers are about 2% higher than pre covid levels, fleeting liquidity and higher policy rates will keep bond market yields in pressure. Apart from that there were slew of measures in budget like taxation on Market linked debenture, TDS on direct buying of bonds, operationalizing of National financial credit depository which are good for debt mutual funds.
Q4. What parameters do you evaluate before buying a debt instrument? How easy or challenging is it compared to evaluating equity stocks?
Whilst investing in a debt instrument ability and intent are two important parameters– understanding the ability of the entity includes not only ability to generate adequate cashflows but also to be able to do so consistently with less volatility. To this end, we do due diligence on the financials of the entity, the business fundamentals and market positioning, the management capability and bandwidth and then we project the cash flows of the entity over the period of our investments. To understand the intent of the entity - we study the promoter group, other group and associate companies and the history of the entity and group in general.
The due diligence with respect to Promoters, Management, Business model, financials is very similar for equity however where the approach differs is that debt investors look for adequacy of cash flows to be able to service debt and equity would look for growth in earnings and valuations thereof. Additionally, the relative shallowness in the debt markets versus the equity markets results in analysts looking at debt investments from the prism of “hold to maturity” and hence risk appetite gets tailored that way.
Compared to equity, we think in debt market macro-economic variables have larger overplay. These macro trends helps us making and continuous evaluating all investment decisions.
Q5. Please share some of your key learnings from the last financial year.
For many years, geopolitics played a minor role in the global economic and financial outlook which saw big change last year. What was advertised as a well-telegraphed and gradual normalization quickly turned into the steepest rate hike trajectory in the history of modern finance resulting in the biggest loss across financial assets. This taught us, geo politics is mother of all macro variable and need to watched much more carefully. Given economic cycles have shorten with elevated volatility, importance of being nimble footed and continuous re-evaluation should be the new norm.
Q6. Post budget, which segment would you recommend the investors with long term perspective to invest in?
Post budget we think ,time for dialling active duration risk through short-term funds (Short term fund, corporate bond fund, and Banking & PSU fund) is apt now. Entire AAA yield curve between 1-3 year is available at 7.65% - 8.0%. In one of the worst years for fixed income (2022) when rates have been taken higher by 300bp in last 9 months, our recommended funds on Ultra short-term fund side (Savings, money markets, Floating rate fund, Low duration) did better than liquid fund as markets priced rates hikes well. Most likely in 2023, actively managed funds will do well within fixed income space as play on liquidity needs active modulation. We see limited gains in duration as policy space are constrained and accrual will drive fixed income returns in current year. Thus, short-term investors should look to invest in money market, ultra-short-term funds & low duration funds until more clarity on growth emerges. Investors with a longer-term investment horizon can look to invest in short term funds. Time to dial actively managed short-duration funds is back on a risk reward adjusted basis.