 "Near term benchmark G-sec yield seen between 7.35%-7.65%: Avnish Jain")
Earnings are likely to pick-up from second half of 2016-17, says Avnish Jain, Head – Fixed Income, Canara Robeco Mutual Fund. In an interview with Surabhi Roy, Jain advises investors to select funds based on their risk appetite and investment horizon. From a long term perspective, with the expectations of rates coming down, an investor could benefit by investing in medium-to-long term funds. Edited excerpts:
Post Budget, Nifty50 has surged by over 10%. How do you see the markets panning out ahead of the fourth quarter earnings season, RBI policy and key economic data?
We expect markets to remain volatile till the time financial stability returns in the global markets. From domestic economy stand-point, corporate earnings appear to be bottoming out but we may see a muted earnings season in the 4th quarter. We believe earnings are likely to pick-up from second half of 2016-17. Post the Centre’s reduction in rates of small saving schemes, there are expectations of rate cut in RBI’s April’16 monetary policy.
What impact could the US Fed's decision to continue with its low interest rate regime have on foreign fund inflows to emerging markets especially India?
We had seen some selloff from Foreign Portfolio Investors (FPIs) at the start of this calendar year. However, there has been a turnaround in FPI investments since March’16.
India is better positioned amongst emerging market economies. Moderating Inflation, adherence of fiscal target for FY2017 at 3.5%, improving India’s CAD and other domestic macroeconomic indicators puts India in a sweet spot and make it an attractive investment destination.
Where do you see benchmark 10 year G-Sec yield in three months? What kind of products would you suggest to fixed income investors?
With the inflation hovering in RBI’s comfort zone and the government slashing interest rates on small saving schemes, possibility of rate cut in coming policy is back on the table. We expect the 10 year g-sec yield to range between 7.35% and 7.65% in the near term.
An investor should select fund based on his/her risk appetite and investment horizon. From a 3 month perspective, an investor could look at Ultra Short term / Short term funds. While from a long term perspective, with the expectations of rates coming down, an investor could benefit by investing in medium-to-long term Funds.
According to Sebi's statement, mutual funds are emerging as a strong counterbalance to FPIs as they infused Rs 75,000 crore in the equity markets during the first 11 months of the fiscal. Do you see the trend to continue or will FPIs pull out money in case the momentum fizzles out?
Capital markets have witnessed increased domestic participation over the past year or so. One of the reasons for underinvestment in equity markets was the increased volatility in global markets over the past few years which affected investor confidence. Several measures taken by SEBI, towards investor protection has boosted confidence amongst investors.
We believe that this trend is here to stay and we might witness increased participation from domestic investors in coming years.
Amid current market situation, should an investor go for a lump-sum investment option or would you still prefer the SIP (Systematic Investment Plans) route?
SIP is the best mode through which an investor can take advantage of such market corrections. SIP enables an investor to invest more during dips and also staying invested in different market scenarios will help even out the volatility.
Among other fixed income instruments, what is your take on commercial paper and corporate bonds? Are there any corporate bonds worth investing at current levels?
Currently the spread between benchmark 10 year G-sec and repo rate is of ~ 80-90 bps. The government’s intense focus to stick to the fiscal target and borrowing figures may help consolidate the interest rates in a narrow range. This would reduce the spreads between shorter maturity instruments viz. commercial papers & corporate bonds) and similar maturity G-sec, thereby making them a good buy.
We expect high quality commercial papers to be the biggest beneficiaries of the yields softening in the near end of the curve. Corporate Bonds on the other hand may be further influenced by demand supply matrix though they are broadly expected to mimic the downward trajectory. We expect the 3-5 year space to benefit the most of this changing interest rates scenario.
What is your medium term outlook for the Indian rupee in wake of the strengthening dollar?
The Indian rupee has been on a depreciating trend against the US dollar in the recent past. The improved risk sentiment and pick up in portfolio flows has helped the USD-INR to settle near Rs. 66.50/USD level.
We expect it to remain range bound for the remaining part of the year in absence of any fresh triggers. However on trade weighted REER basis rupee remains overvalued, indicating vis-à-vis other emerging markets, INR has depreciated less against the USD.
Bonds yields have fallen to 32-month low assuming that the centre’s move to cut interest rates on small savings schemes would hasten the fall in interest rates in the economy. What trends do you see for the bond yields in the last quarter of the current fiscal?
The Reserve Bank had been very observant in aligning the interest rates with inflation of the country. With RBI reducing 125 basis points in the calendar year 2015, the effect wasn’t seen to be transmitted by the banks.
The rally in government bonds also rubbed off on corporate debt, but the fall in yields has been limited as credit quality issues prevented a steeper fall. Historically however the interest rates in the last quarter of a financial year remain higher on account of tightened liquidity and balance sheet borrowing.
Canara Robeco Balance Fund has been one of the best performers among the hybrid category with around 20% return in 2-year. What is your approach in fund allocation?
Canara Robeco Balance aims to not only generate long-term capital appreciation but also accrual income through a judicious mix of equity and debt. The equity portion of the fund is invested in large caps & quality mid caps with the aim to provide stability and liquidity to the portfolio.
On the Fixed Income side, investment is made in highly rated instruments or money market securities depending upon the interest rate environment. The exposure in such high rated debt instruments is taken to reduce credit risk in the portfolio.
With a careful blend of select stocks and debt securities, the fund endeavours to enhance performance along with helping investors to diversify across different asset classes. This has been the reason for the fund being able to generate returns for the investors.
What is your outlook on gold and crude oil?
The looming crisis across global financial markets brought out a rally in Gold, as it rose by almost 10% (in Feb’2016) from its previous levels. The domestic price of gold also reflected the same as it gained by almost 9% during the month of Feb’16. We expect the levels of Gold to remain supported at current and may increase from here as global situation remains volatile.
Since hitting multi-year lows early last month, oil has rallied by ~ 50%. International benchmark Brent crude hit $27 a barrel on 11 Feb’16 and has hit several new 2016 highs in the past two weeks. The prices panning out in the future will be heavily dependent on the events that unfold in absence of which the crude oil prices are expected to be range bound in $30-$50 range.
Post Budget, Nifty50 has surged by over 10%. How do you see the markets panning out ahead of the fourth quarter earnings season, RBI policy and key economic data?
We expect markets to remain volatile till the time financial stability returns in the global markets. From domestic economy stand-point, corporate earnings appear to be bottoming out but we may see a muted earnings season in the 4th quarter. We believe earnings are likely to pick-up from second half of 2016-17. Post the Centre’s reduction in rates of small saving schemes, there are expectations of rate cut in RBI’s April’16 monetary policy.
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So far the macroeconomic data looks positive; inflation is moderating, the fall in crude oil prices has helped in reducing trade deficit which in turn has resulted in benign 3QFY16 CAD numbers. In near term, markets are likely to be volatile till global dust settles down.
What impact could the US Fed's decision to continue with its low interest rate regime have on foreign fund inflows to emerging markets especially India?
We had seen some selloff from Foreign Portfolio Investors (FPIs) at the start of this calendar year. However, there has been a turnaround in FPI investments since March’16.
India is better positioned amongst emerging market economies. Moderating Inflation, adherence of fiscal target for FY2017 at 3.5%, improving India’s CAD and other domestic macroeconomic indicators puts India in a sweet spot and make it an attractive investment destination.
Where do you see benchmark 10 year G-Sec yield in three months? What kind of products would you suggest to fixed income investors?
With the inflation hovering in RBI’s comfort zone and the government slashing interest rates on small saving schemes, possibility of rate cut in coming policy is back on the table. We expect the 10 year g-sec yield to range between 7.35% and 7.65% in the near term.
An investor should select fund based on his/her risk appetite and investment horizon. From a 3 month perspective, an investor could look at Ultra Short term / Short term funds. While from a long term perspective, with the expectations of rates coming down, an investor could benefit by investing in medium-to-long term Funds.
According to Sebi's statement, mutual funds are emerging as a strong counterbalance to FPIs as they infused Rs 75,000 crore in the equity markets during the first 11 months of the fiscal. Do you see the trend to continue or will FPIs pull out money in case the momentum fizzles out?
Capital markets have witnessed increased domestic participation over the past year or so. One of the reasons for underinvestment in equity markets was the increased volatility in global markets over the past few years which affected investor confidence. Several measures taken by SEBI, towards investor protection has boosted confidence amongst investors.
We believe that this trend is here to stay and we might witness increased participation from domestic investors in coming years.
Amid current market situation, should an investor go for a lump-sum investment option or would you still prefer the SIP (Systematic Investment Plans) route?
SIP is the best mode through which an investor can take advantage of such market corrections. SIP enables an investor to invest more during dips and also staying invested in different market scenarios will help even out the volatility.
Among other fixed income instruments, what is your take on commercial paper and corporate bonds? Are there any corporate bonds worth investing at current levels?
Currently the spread between benchmark 10 year G-sec and repo rate is of ~ 80-90 bps. The government’s intense focus to stick to the fiscal target and borrowing figures may help consolidate the interest rates in a narrow range. This would reduce the spreads between shorter maturity instruments viz. commercial papers & corporate bonds) and similar maturity G-sec, thereby making them a good buy.
We expect high quality commercial papers to be the biggest beneficiaries of the yields softening in the near end of the curve. Corporate Bonds on the other hand may be further influenced by demand supply matrix though they are broadly expected to mimic the downward trajectory. We expect the 3-5 year space to benefit the most of this changing interest rates scenario.
What is your medium term outlook for the Indian rupee in wake of the strengthening dollar?
The Indian rupee has been on a depreciating trend against the US dollar in the recent past. The improved risk sentiment and pick up in portfolio flows has helped the USD-INR to settle near Rs. 66.50/USD level.
We expect it to remain range bound for the remaining part of the year in absence of any fresh triggers. However on trade weighted REER basis rupee remains overvalued, indicating vis-à-vis other emerging markets, INR has depreciated less against the USD.
Bonds yields have fallen to 32-month low assuming that the centre’s move to cut interest rates on small savings schemes would hasten the fall in interest rates in the economy. What trends do you see for the bond yields in the last quarter of the current fiscal?
The Reserve Bank had been very observant in aligning the interest rates with inflation of the country. With RBI reducing 125 basis points in the calendar year 2015, the effect wasn’t seen to be transmitted by the banks.
The rally in government bonds also rubbed off on corporate debt, but the fall in yields has been limited as credit quality issues prevented a steeper fall. Historically however the interest rates in the last quarter of a financial year remain higher on account of tightened liquidity and balance sheet borrowing.
Canara Robeco Balance Fund has been one of the best performers among the hybrid category with around 20% return in 2-year. What is your approach in fund allocation?
Canara Robeco Balance aims to not only generate long-term capital appreciation but also accrual income through a judicious mix of equity and debt. The equity portion of the fund is invested in large caps & quality mid caps with the aim to provide stability and liquidity to the portfolio.
On the Fixed Income side, investment is made in highly rated instruments or money market securities depending upon the interest rate environment. The exposure in such high rated debt instruments is taken to reduce credit risk in the portfolio.
With a careful blend of select stocks and debt securities, the fund endeavours to enhance performance along with helping investors to diversify across different asset classes. This has been the reason for the fund being able to generate returns for the investors.
What is your outlook on gold and crude oil?
The looming crisis across global financial markets brought out a rally in Gold, as it rose by almost 10% (in Feb’2016) from its previous levels. The domestic price of gold also reflected the same as it gained by almost 9% during the month of Feb’16. We expect the levels of Gold to remain supported at current and may increase from here as global situation remains volatile.
Since hitting multi-year lows early last month, oil has rallied by ~ 50%. International benchmark Brent crude hit $27 a barrel on 11 Feb’16 and has hit several new 2016 highs in the past two weeks. The prices panning out in the future will be heavily dependent on the events that unfold in absence of which the crude oil prices are expected to be range bound in $30-$50 range.