There have been concerns regarding the revival and sustenance of economic growth at the global level. Domestically, the Reserve Bank of India (RBI) has to deal with the double whammy of sticky inflation amid concerns of a rising fiscal deficit. Chaitanya Pande, head (fixed income), ICICI Prudential AMC, tells Puneet Wadhwa the debt segment is likely to give reasonable returns, going ahead. Edited excerpts:
What is your expectation of how things will unfold for the global economy over the next few months?
Global growth is witnessing a slowdown, even across emerging economies like China. Given this, central banks usually react by cutting rates. The recent minutes of the US Federal Reserve also indicate some action that may come in the course of the next month. The European Central Bank (ECB) is also talking of stepping up its bond buying programme.
But ECB has rejected claims that it may resort to buying Euro zone countries’ bonds if their borrowing costs breach certain levels...
Over a longer period, if there is no resolution, it is possible that ECB might resort to buying euro zone country bonds. However, given where markets and the economy is placed currently, it seems unlikely in the immediate future. If ECB is unable to or does not support the bonds of its constituent, then there is likely to be questions raised on the survival of the Euro zone.
Should bond market players be worried?
India has reasonable linkages to the European economy, both in terms of trade and investment. There could be some further strain in these segments as a result of the above concerns. This impact has already been seen over the last six months with the widening of spreads on Indian bonds. Also, a lot of Indian companies have begun refinancing their international loans through the domestic route.
What is your interpretation of the economic data from the US and China? What are its implications for the global equity and debt markets?
With data from both these segments being weak, we expect central banks to sooner or later begin the easing cycle. The Chinese central bank may therefore look to ease on yields or liquidity. This could, however, have some positive for India by way of risk-on trade leading to increase in inflows/investments into India. It could also lead to increase in commodity prices, thereby impacting inflation.
What is your assessment of the quantum of portfolio flows that India can attract in the second half of 2012 among its BRIC and emerging market (EM) peers?
Flows into emerging markets, including India, will be an asset allocation play. To that extent, flows into the emerging markets will continue. India will also be a participant and get an allocation in-line with the trend. However, we do not expect any incremental inflows viz-a-viz the emerging peers. Only thing that could positively change/impact the trend will be reform.
Do you see the debt segment outperforming equity and other asset classes over the next few quarters?
Debt is likely to give reasonable returns and thereby add value to an investor’s portfolio. Portfolio yields are at reasonable levels, and we expect rates to come off slightly over the next few quarters, thereby providing reasonable risk-adjusted returns potential.
Equity returns should not be looked at from a short-term perspective. In line with this theory, the equity markets continue to provide an investment opportunity.
RBI continues to remain very hawkish. Do you see this stance changing anytime soon if the government fails to get its act together?
Yes, RBI in its last policy has been hawkish and will continue to be so for the next couple of months. Given the uncertainty on the monsoons and the lack of any pass-through on petro-products, RBI’s hands were more or less tied in pushing the rate cutting cycle ahead.
However, since growth is likely to be weak, that will lead to, over time, a significant slowdown in manufacturing inflation. It will then provide RBI with headroom to start a gradual rate cutting cycle over the next 12–18 months.
How do you see the key economic indicators such as gross domestic product (GDP), inflation, etc, in the Indian context?
We expect upcoming GDP numbers to be continuing its downward trend and expect this to continue to hold for a couple of quarters. Internal factors by way of requisite policy action through demonstrating fiscal prudence and pass through of oil prices is what can help revive growth. Alternatively, external factors like oil prices coming off can also help improve growth potential.
On the inflation front, headline inflation is likely to remain elevated given the increase in food and commodity prices. Below average monsoons so far have been adding to the train on food inflation. A reasonable pick-up in the winter crop can help mitigate some of this impact. At the same time, manufacturing inflation is close to peak. A slowdown in growth, eventually leading to moderation in demand, will help stabilise this.
What are you advising your clients now? What kind of funds are seeing more inflows/preference given the macros and why?
As the yield curve steepens, we continue to believe the short-to-medium term range offers maximum value. We, therefore, recommend investors continue to look at the one – three years’ for bulk of their investments. For investors having the ability to take some volatility, it is also the right time to incrementally add duration and gradually tilt portfolio allocation towards the next step onto a higher duration fund.
