Mr. Ritesh Jain
SVP & Head of Fixed Income, HSBC Asset Management India
Ritesh Jain has been a SVP and Head of Fixed Income in the India Fixed Income team since June 2019. He has been working in the industry since 1998. Prior to joining HSBC Global Asset Management, India, Ritesh was a President, CIO-Fixed Income at IIFL Asset Management, Head–Fixed Income at Pramerica Asset Management and Principal PNB Asset Management Company. He holds a Bachelor’s degree from University of Calcutta and PGDBA (Finance) from Mumbai University, India.
Q . What’s your outlook on the Indian debt markets and yield curve? Do you anticipate further high volatility over the upcoming few months?
Answer : The Indian Debt market over last couple of quarters has remained quite volatile on the back of heightened inflationary pressure and expectations. The bench mark 10-year Government bond has moved up by more than 150bps during the period. For now, the traditional multi variable factors that affect the market seems to have been relegated to the back seat and in prominence- the inflationary outlook is dictating terms. Along with that, the Global rate environment that has hardened as well and domestic supply of Sovereign assets in line with elevated borrowing schedule for the year seems to be at play. Markets seems to have a limited appetite to absorb that kind of supply given headwinds that is clouding the rate environment. The hitherto support of RBI too is absent now given the limited head room availability. The overall impact is significant tightening in rates in the recent past.
Given this backdrop, the very near term outlook continues to remain uncertain and volatile, However, from medium term perspective, we maintain a positive outlook. The inflationary trajectory is likely to start moderating by third or fourth quarter of this fiscal. The recent cooling in Crude and commodity prices, Positive base effect, normalization is supply side issue, Normal monsoon and the lag effect of recent Government actions specifically on excise duty cut will start having a soothing effect on inflation. Though we not pronouncing a recession outlook in US, but the demand slowdown too will help in moderating inflationary expectation. The domestic yield curve too seems to have already discounting a lot of near term negative and higher rates over the course of next few quarters. And fundamentally, with a prospective funding cost of 6%, the current yield curve with the benchmark 10-year being ~7.50% seems attractive from medium term perspective. In the very near term, the outlook remains volatile because of the technical factors at play.
Q . When it comes to investing strategy, how do you differentiate yourself from your competitors and what competitive edge do you have over them?
Answer : We have a process oriented set-up and never try to be an outlier in the short-term on performance tracker. We believe that a consistent methodology is a key to success in the long run. We have many first in the Indian Fixed-income markets that were unheard of or made its way in the markets quite later. For Example, in managing Liquidity Funds- we have a process driven approach called as “Liquidity Investment Internal Guideline”, which is in vogue for almost a decade now with us. SEBI recently came out with guidelines on managing Liquidity fund. Most of the process as defined in the guideline in fact has been our process for years now. We realize that we have been a pioneer in term of thinking and implementing the best practices much in advance when anybody else could think on those line. Similarly, the factor process approach is defining duration band for positioning of portfolio is something unique to us. These things have been a part of our investment process and strategy which are unique to us.
Q . Can you explain how the Federal Reserve's upcoming rate hikes will impact the Indian debt markets?
Answer : The concept of an isolated Island in the financial world have long lost and now financial markets across the globe are interlinked and related. The action of Global Major Central banks does have an effect on other emerging markets and as such India too is not isolated. In simple terms, when FED hikes, dollar strengthen versus other currency and Dollar assets become relatively attractive vis-a—vis other currency denominated assets. The Rupee too have a depreciating effect, which in turn is inflationary as our trade and current account is in deficit. It cost more to import Crude and other commodity in which we are dependent. And we know inflationary outlook leads to higher interest rate. To some extent, the near term FED rate hikes are already discounted by market and are there in bond pricing. If at all, FED maintains a prolong hawkish stance and hikes much more than expectation then it could have further bearing and hardening in the local rates.
Q . Which categories of debt funds are expected to perform well in the face of rising inflation?
Answer : Interest rate and Inflation are cyclical in nature and it is only the time period of that cycle that varies. In that context it is very difficult to time the cycle and catch every crest and trough. Toward that, the asset allocation with a particular level of risk appetite becomes all the more important in long run. Different products present different opportunities across market cycles and these caters to different risk and return appetite. While short-end funds tend to do well with respect to consistency and volatility, their ability to generate return in a falling interest rate regime is limited. Similarly, while Long duration strategy tend to be higher in terms of volatility, hence are categorize are relatively risky, their ability to generate capital gain is much higher in environment when interest rate moving down.
The investors with very little risk appetite can continue to be in the low duration- risk positioning while one with a bit of risk appetite and time horizon can look to invest in relatively higher duration funds. In the medium term (1-3year time) citing moderating inflationary scenario, we maintain a positive outlook on market and believe duration products will make money albeit with a relatively higher degree of volatility.
Q . How are you positioning your debt fund portfolios in the current scenario?
Answer : The positioning in the funds are always in line with the categorization as far as duration bands are concerned. On the whole we maintaining neutral to marginally underweight duration stance citing near-term headwind. Our internal factor process output for funds positioning also indicating on the similar trends. Under index category we are in line with the index. On credit side, we maintaining underweight stance across portfolios as we view that the pricing on the credits in terms of spreads are not compensating for the additional credit risk that we are taking in the portfolio. The credit spreads continue to remain tight and we view these to be relatively less attractive than sovereigns. Should spread widens from hereon, incrementally we will look to increase our exposure in credits. For now, continue to maintain under-weight positioning.
Q . At present, how a retail investor with long term horizon should approach debt funds?
Answer : From medium to long term perspective, the entire yield curve is attractively priced. The roll down strategies and Target maturity funds make sense for them to start their fixed-income journey. Locking into medium term product (4-6 years Target maturity funds) at the current prevailing yields (around 7.50% now) make sense. The investment beyond 3-years, factoring in indentation benefit on the long term capital gain likely to yield better than most other fixed-income product on a post-tax basis.
Source: HSBC Asset Management, Data as at 30 June ’22 unless otherwise given.
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