Mr. Mayank Prakash
Fund Manager (Fixed Income)
BNP Paribas Mutual Fund
Mr. Prakash has over a decade of robust experience in debt fund management, where his speciality lies in solving clients’ pressing challenges. As a fund manager, he develops fixed-income portfolios and processes market analytics that helps clients stay ahead of the curve.
In his previous stint, Mr. Prakash was fund manager with Kotak Mahindra Asset Management Co Ltd. and helped research equities. His commitment to clients, dedication to in-depth research, and proven expertise is what makes him stand out.
Mr. Prakash is a Chartered Accountant and has completed his Master’s in Business Administration from Kanpur University.
Q. What are the key issues of concern for the debt markets today? Why are the bond prices under pressure?
In our view the macro variables - current account deficit, inflation, fiscal deficit and oil price - which behaved well in the last three years are exhibiting mean reversion and the micros (read earnings) are likely to do well. In this context we believe the year 2018 could be the year of the “U-turns” for both macro and micros.
Interest rates have bottomed out and the bond market is clearly indicating this change. The rise in demand for money in spite of demonetization is also a symptom of rising inflation along with rise in growth which is negative for long term bonds. Till now only government bonds have reacted to this change and it is yet to be reflected in corporate bond yields which should likely start rising now as the supply of government papers crowds out demand for corporate papers, especially lower rated corporates. I am also concerned about the rising crude prices because government finances have got a leg up owing to duties on oil prices and if they do not pass on the recent price rise it would be inflationary in nature.
Q. The 10 year G-Sec bond yields have increased over 100 basis between August till today which stands at 7.4%. This has resulted in many long term funds performing worse than short term funds. What is your expectation on the yields curve going forward?
Our base case remains for a rate hike in the next 6 to 9 months, possibly in Q1 FY 2019. In an inflation targeting regime, we believe that the central bank has a tendency to act pre-emptively when inflation is rising, though it would prefer to wait and watch before cutting rates when inflation declines. Nevertheless, we are not expecting an aggressive hiking cycle as the RBI largely held its ground, refraining from any significant monetary easing as inflation fell. Inflation is likely to average around 5% in FY 2019, up from an estimated 3.70% in FY 2018. We expect 10 year G-Sec bond yields to slowly inch upwards in the next 6-9 months from 7.75-8.0% on account of rising inflation and interest rates.
Credit growth rate to be greater than deposit growth leading to not only rising rates for lower rated corporate bonds but also widening spreads.
Hence, we are clearly cautious on bond markets and hence would recommend investors to consider investing only at the shorter end of the curve.
Q. What would be your expectations or wish list from this government in coming days, especially the upcoming budget?
Answer: The ruling BJP party retained its lead in Prime Minister Narendra Modi’s home state of Gujarat, albeit by a narrow margin. As the party faced some push-back in the rural areas of the state, we believe there could be an increase in government spending on the rural economy in the upcoming 2018 Union budget, which could be the last full budget before the general elections in 2019.The government has been focused on accelerating infrastructure spend in order to provide the much needed boost to the economy as the private sector capex is yet to pick up. Government’s focus has been on Road, Railways, Defence and affordable housing. We believe that is likely to continue going forward as well. At the state level, we have seen farm loan waiver announcement by few states and there may be some more which could reduce the debt burden of farmers to some extent providing some scope for consumption improvement. From a longer term perspective, the government’s focus is on doubling farmer’s income. One step in that direction is the increase in crop protection which the government is targeting to take to 50% coverage by FY2019. The recent improvement in India’s ease of doing business ranking has provided a positive traction and we believe this will be in focus in the upcoming budget. While some of the measures can test the combined fiscal deficit limits, we believe overall the measures can help in growth.
Q. What is your view /opinion on the SEBI's mandate for consolidation of schemes and listing of defined categories? How will it affect the performance of debt funds?
Answer: The SEBI categorisation exercise was aimed towards bringing in uniformity in the investment strategies offered and to reduce the number of duplicate funds in each category. As a result investors should be able to clearly identify categories / funds as per their investment needs given that there will be apple to apple comparison between the funds and that coverage by rating agencies on funds will be uniform going forward.
Investors may need to keep an eye out for any changes in investment themes and re-evaluate the fund and its fitment in their investment portfolio.
Q. What would be your advice to investors looking to park their money in debt funds considering the current equity market levels? What should be their strategy for investment?
Answer: Due to rising inflation and deteriorating macro we are clearly cautious on bond markets and hence would recommend investors to consider investing only at the shorter end of the curve. Investor could consider short and medium term debt funds in the current environment over a long term investment from an asset allocation perspective.
Q. What is your fund house strategy for both long term and short term debt funds as of now? How are you playing the markets?
We expect 10 year G-Sec bond yields to slowly inch upwards in the next 6 - 9 months to 7.75% - 8.0% on account of rising inflation and rising global interest rates. Globally commodity prices are rising, which does not augur well for consumer inflation. Hence, we are clearly cautious on bond markets and hence would recommend investors to consider investing only at the shorter end of the curve.
For the Short Term Income Portfolio, we intend to maintain its average maturity at around 1.5 years. We expect the banking system liquidity to be close to neutral and thus overnight rate could hover around 6%. Currently, we believe that the money market rates are fairly priced in. We thus expect the money market exposure in the portfolio to provide stability. The fund remains open taking tactical duration calls.
For the Medium Term Fund we intend to maintain average maturity of the portfolio at around 3 years. The portfolio has a higher exposure to papers in the 1 – 3 year space and a lower exposure to 5 – 6 year G-Secs. We believe that negative sentiments have already been priced in to the sovereign curve and that best value is being offered in this segment.
Data Source: Bloomberg
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