Mr. Dhawal Dalal
CIO - Fixed Income, Edelweiss Asset Management Limited
Mr. Dhawal Dala has over 20 years of experience and an MBA from Dallas University (USA). He has joined Edelweiss Asset Management Limited in the year 2016. He is responsible for the overall growth of fixed income assets through a healthy mix of retail and institutional clients. Before joining Edelweiss Asset Management Limited, he was the head of Fixed Income at DSP Black Rock Investment Managers Private Limited and led a team of Fund Managers managing fixed income assets. His role there was to expedite overall growth of fixed income assets, performance and client interactions.
1.Have global bond markets eased fears about slow growth, increasing inflation, and a possible recession? What do you think the Indian markets will look like now?
Ans: Current global bond market investment landscape is shaped by the US debt ceiling issue, developing trends in the US economy, sticky inflation in the UK & eurozone and potential hikes from their central banks in the near-term even as global inflation has begun to ease and most central banks appear closer to their terminal policy rates.
Incoming data on the US economy indicates that the headline inflation will likely ease further amid slowing growth momentum, impact of previous rate hikes, recent developments in the US regional banks and tightening of bank lending. This should cause US economy to achieve a soft landing and allow the FOMC to pause rate hikes going forward. That said, prolong uncertainty on the US debt ceiling resolution may have the potential to disrupt US growth outlook and increase volatility in the US bond market.
On the other hand, inflation in the eurozone and the UK continue to remain an issue. The ECB and the Bank of England are expected to raise their policy rates further to bring inflation lower even as economic growth remains resilient in the eurozone.
Amid all these, Indian economy is expected to be in great shape. Headline inflation has begun to ease and is likely to average ~5% in FY24 as compared to ~6.7% in FY23. India’s FY24 GDP growth is expected to be close to 6% and CAD is expected to be close to 2.5% of the GDP. All these should allow MPC to keep Repo Rate unchanged at 6.5% in FY24 before cutting rates in FY25. This should lead to a gradual decline in benchmark 10-year yield in the medium-term.
2. What are certain parameters/factors on your checklist before buying a debt instrument in your portfolio?
Ans: Apart from checking regulatory compliance limits – such as single issuer exposure limit, group exposure limit, sector exposure limit etc., we also check the following parameters for additional information:
Term sheet of the debt: Careful analysis of the term sheet allows us to analyse the purpose of raising debt, latest financial update of the borrower, business update, structure of the debt, top 10 lenders, shareholding structure, recent developments in the sector and the borrowing entity etc. This information provide key inputs of various parameters before investing.
Analysis of various disclosures on the Stock Exchanges: Recent changes in the regulations have made it mandatory for the borrowers to disclose important developments on the Stock Exchanges on timely basis. A careful analysis of these disclosures help in forming a view on the borrowing entity before investing and monitoring of risk after investing. We also track borrowers and their promoters in the media and on various platforms for any material developments that may hamper our investments.
Relative value: It is important to ensure that we are being rewarded for the risk that we are taking on behalf of our clients. For that, we check relative credit spreads, secondary market liquidity, investor concentrations, potential refinancing of maturities in the near-term, movement in global bond yields of the same issuer etc. before investing. This should provide us with some comfort on relative valuation.
What is duration in the debt market? How important is it to consider while purchasing a debt scheme?
Ans: Duration is a measure of price risk at the portfolio level. Higher the duration of the portfolio, higher is the price risk for investors. For example, if a portfolio duration of 2 years means that value of the portfolio will increase by 2% in case of a 1% decline in bond yields and vice versa. This makes duration an important measure of risk from client’s perspective.
In case of expected decline in bond yields in the medium-term, investors generally invest in bond funds with higher portfolio duration. This helps them optimize their total returns for a unit of decline in bond yields.
Similarly, during expected increase in bond yields, investors should prefer bond funds with relatively lower portfolio duration. This will protect their investments with downside risk in case of upward movement in bond yields.
4. Do you think RBI is overestimating growth with 6.5% projection for FY24? What risks would drive if an investor is on the same page with RBI?
Ans: While both GOI and RBI expects FY24 GDP growth to be 6.5%, the market consensus seems to be below 6% with wide band of estimates. We believe that the optimistic projection of FY24 GDP growth is probably based on the Q1FY24 real GDP growth of 7.8% y/y and assumption that the consumption-led Indian economy may defy weakening trend of global growth cycle. Many market participants find this hard to believe at this point.
Lower-than-expected real GDP growth along with declining headline inflation may cause FY24 nominal GDP growth to be in 10-11% range as compared to FY23 nominal GDP growth of 13-15% range. Softer FY24 nominal GDP growth, in turn, may weaken Corporate India’s profitability and net direct tax collections.
That said, ahead of the national elections next year, RBI is expected to support economic growth by taking various measures to shore up banking system liquidity and keep real policy rates in check in our view.
5. What are your thoughts on buying corporate bonds in view of the debt market? Do you think the CDMDF (Corporate Debt Market Development Fund) will be effective to lower investors' risk?
Ans: The proposed Corporate Debt Market Development Fund is a backstop fund to be used during market dislocations. The initial corpus of this proposed fund will be raised from the proportionate contribution from participating mutual funds. The fund will also have the ability to leverage 10x with the help from guarantee structure from the GOI. Finer details are still being worked out.
The primary objective of this facility is to provide liquidity support to mutual funds during periods of high redemption pressures when secondary market liquidity is severely hampered. However, we believe that this facility will probably reserve bulk of the liquidity support for high-quality bonds (AAA/AA+) only for their relatively better secondary market liquidity during the normal times.
To that extent, access to this facility will probably result in relatively lower volatility in high-quality bonds during period of market dislocations or temporary decline in secondary market liquidity in our view.
