Interviews

Mr. Shriram Ramanathan

CIO - Fixed Income, HSBC Mutual Fund

Mr. Shriram Ramanathan oversees the management of more than Rs 30,000 cr in assets across various fixed income funds. He has over 18 years of experience in fixed income markets.

Shriram was managing the Global Emerging Market Debt (Asia) at ING Investment Management Asia Pacific in Hong Kong for about 5 years. His earlier assignments were with Zurich Asset Management Company in fixed income research and with the Treasury department of ICICI Bank, where he started his career in investments in 2000.

Mr. Ramanathan is a Chartered Financial Analyst and holds a Post Graduate Diploma in Business Management from XLRI Jamshedpur and an Engineering degree from the University of Mumbai.

1. The Fed raised interest rates by 25 bps in March, May, and July 2023. Fitch expects one more hike to 5.5%- 5.75% by September. How will this affect Indian markets? How should conservative to balanced investors react to such moves by the Fed? Suggest your views.

Since March 2022, all central banks across the world have moved out from extra accommodative policies introduced during covid and the focus has been shifted to addressing the very high inflation by increasing interest rates aggressively. In calendar year 2022 the fed raised rates by 425bps while this year they have raised rates further by 100bps to 5.25%-5.50%. The pace of rate hikes has reduced in this calendar year vs last year. In India too, the MPC (Monetary Policy Committee) increased repo rate by 250bps from 4% to 6.50%, while the overnight rates have moved up from 3.35% (reverse repo rate during Covid) to 6.50% (Repo rate now), an increase of 315bps. Increasingly the monetary policies across the world which moved in coordination since covid, both in terms of cutting rates and then raising rates, are now diverging to address the domestic growth – inflation issues. In India, the MPC and RBI may try and address the domestic inflation issues while keeping growth in mind through their policy tools.

2. The yield on the Indian 10-year government bond surged past 7.16% along with tracking the upward momentum for bond yields in the United States. On the other hand, the credit rating in the US was recently downgraded from AAA to AA+ by Fitch ratings. How can this impact bond markets in India now? Should investors consider some early warning signals? Kindly brief.

In the last 4-5 months, the US 10yr treasury yields have moved up by 100bps from a low of 3.30 to 4.30% while Indian 10yr G-Sec yields have moved up by only 20 bps from 7% to 7.20%. This has to do with the domestic orientation of the MPC and RBI, inflation broadly under control in the 1^st quarter of FY 24. The bond markets in India will incrementally take cues from domestic factors like the runaway price increase in vegetable inflation lead by tomatoes and how it impacts other components in the vegetable and broadly on the food basket. The recent rise in prices of cereals and pulses as well as the impact of erratic monsoon is a cause of concern. The markets will be keenly watching the MPC reaction to this rise in inflation and the second order impact on broader inflation from this increase. Till now the MPC has decided to see through the one-off spikes in inflation caused by vegetables. On the other hand, the recent sovereign rating downgrade of US by Fitch won’t have much of an impact as dollar remains the reserve currency of the world and US is the largest economy in the world.

3. What are some medium-fiscal challenges that should be considered while investing in debt funds? Give your ideas.

In India, like in most other global economies, the central banks along with the respective governments came up with a coordinated monetary and a fiscal response to address the growth situation during Covid. While the monetary accommodation since then has been withdrawn and tightened in the last year and half, the fiscal policies in most economies are nowhere near to the pre-covid levels. The Debt to GDP ratio for all economies stands at the highest and now that interest rates have risen across economies, the incremental cost of funding this debt is posting greater challenges. While certain economies where growth is strong are well placed to address this challenge, many others are not and that will cause greater volatility both in the debt markets as well as the currencies. In India too the fiscal deficit to GDP ratio pre covid was at 3.5% while currently the target for FY 2024 is at 5.9%. However, in India, the growth is still resilient and we are one of the only major economies to grow above 6%. Also, our balance of payment position is much better bringing much stability to INR. The Government along with RBI are actively working towards bringing the spikes in food inflation under control. Considering these factors in.

4. HSBC Liquid Fund has given good returns to investors so far. What is your investment strategy behind handing this fund? Any important investment mantra you would like to give to retail investors for investing in similar or related categories of debt funds hereby?

HSBC Liquid fund has been investing in high quality well researched credits in upto 91 days maturities. It is ideal for investors to park their liquidity for shorter period. Investors can also look at funds like HSBC Ultra Short Duration Fund, HSBC Money Market Fund and HSBC Low Duration Fund with similar focus on high quality well researched credits and an investment horizon of upto 1 year.

Mr. Anupam Joshi

Portfolio Manager and Fund Manager - Fixed Income, HDFC Mutual Fund

1. What is the investment strategy being followed by the HDFC Corporate Bond Fund? How are you selecting the securities?

The fund predominantly invests in AAA and sovereign instruments. The endeavour of the fund is to capture the attractiveness of the spread between Gsec and corporate bonds, on a risk adjusted basis, while not compromising on the credit quality of the portfolio.

Before investing we tend to follow rule of SLR – safety, liquidity and returns, generally prioritized in that order. Security selection is done based on the credit assessment framework which inter-alia includes industry, company and financial analysis, parentage, management quality, etc. Further, we have our internal credit risk assessment model which is used to determine the exposure limits on each issuer and group.

2. India's external debt saw a marginal rise to USD 624.7 billion by the end of March 2023, accompanied by a decline in the debt-to-GDP ratio. How will it impact the interest rates hereafter? What are the considerations that investors can keep in mind?

Most of the external debt in India is taken by corporates whereas government exposure to foreign currency denominated debt is very limited. Further, FPI holding in Indian sovereign securities remains low (<2% of the overall outstanding debt). Since large part of India debt is locally funded, the impact on the interest rates are more likely to follow domestic macro-economic variables, till the time current account and foreign exchange reserves remains at comfortable levels.

Given India’s stable to improving macros as well as strong external sector position, we believe that RBI can maintain its focus on domestic growth inflation dynamics rather than overly worry about DM central bank actions. Our base case view is that of a prolonged pause on interest rates by RBI. INR on REER basis (Real effective exchange rate) remains in undervalued territory and thus, depreciation from here on appears unlikely. Overall, given the declining inflation (looking through the spike in vegetable prices), already done rate hikes, comfortable domestic liquidity -makes India a very attractive investment destination. Hence, from a investment perspective, these conditions should augur well for shorter to medium end of the yield curve on a risk adjusted basis and one may consider increasing debt allocation from a medium term perspective.

3. How do you anticipate the flows into debt funds over the next few months?

Considering debt mutual fund schemes offer a good liquidity profile to the investors with minimal impact costs, we expect business as usual for majority of debt mutual fund schemes. This hypothesis is also corroborated with visible improvement in the flows to debt schemes in Q1FY24, first quarter post the withdrawal of indexation benefits from the debt schemes. We have often seen that if compared on a like to like basis, debt Mutual Fund schemes’ s portfolio YTMs are generally at par or better than any other alternative investment opportunities without any compromise on the credit quality.

4. Large investors seem to be taking more interest in T-bills instead of long-term bonds as there is no clarity on the interest rate cycle. What is your take on upcoming interest rates with this regard? Where are your positions standing currently?

Over the past few years, AUM of the large long term investors like PF / Pension funds and Insurance has increased significantly. The aggregate holding in Government securities of all the above has increased and is now higher than Banks holding. Given the long term nature of flow to these investors, the bonds at the longer end have seen significant stability in past few years. As growth moderates and inflation trends lower, we expect the longer tenure performing well due to capital appreciation, apart from higher accruals over the medium term.

In the near future, we expect interest rates to trade within a narrow range with a downward bias. The above is in view of expectation of prolonged pause from RBI, moderating growth and slowing inflation, DM central banks being closer to peak and relatively balanced SLR demand-supply. Investors, on the basis of their individual risk appetite, can consider locking current prevailing yields in a phased manner or else they might be exposed to reinvestment risk. Hence, we are recommending investors to lock in for longer.

5. RBI expects CPI inflation at 5.1 per cent for 2023-24 (Q1 at 4.6%, Q2 at 5.2%, Q3 at 5.4% and Q4 at 5.2%. Are you in line with these expectations and why? Kindly brief.

Before the spike in vegetable prices, we were largely in agreement with RBI estimates. However, the sharp rise in veggies prices, we believe that Inflation in the near term can significantly overshoot RBI’s estimate in Q2 and thus, RBI estimates for whole year are likely to be marginally revised upwards.

#For latest riskometer, investors may refer to the Monthly Portfolios disclosed on the website of the Fund viz. www.hdfcfund.com

DISCLAIMER: Views expressed are of Mr. Anupam Joshi, Fund Manager - Fixed Income, of HDFC Asset Management Company Limited as of 25^th July 2023. The current investment strategies are subject to change. The Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Readers should seek professional advice before taking any investment related decisions.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

Mr. Gopal Agrawal

Fund Manager - Equity, HDFC Mutual Fund

1. The year began on a turbulent note amidst concerns over unfavorable global markets. What can be various aspects to look forward to staying invested in Indian equity markets for medium to long term?

Markets can be volatile in the short term, driven by various events. Investors are best placed to consider ignoring short term volatility and continue building portfolios towards long term goals. Having said that, we have observed that any fall in markets due to global reasons have been a buying opportunity for a long investor, and this current market seems to have validated that trend.

In the long run, markets are largely driven by earnings growth, which in turn is impacted by a host of factors, with GDP growth being a key contributor. Growth outlook for Indian economy is strong. Reforms and measures by the Govt. over the past few years have strengthened the same.

Other factors that investors today could keep in mind are 1) valuations of Indian equities being lower from recent highs on account of rising earnings, 2) Recovery of the private capex cycle, 3) improving manufacturing competitiveness. In terms of risks, key risks emanate from slow global growth, higher global and Indian interest rates for a longer period of time, and other geopolitical risks.

2. What has triggered the sudden change in market sentiment in India?

Significant buying from Foreign Institutional Investors seems to be a key reason in the sudden change in current market valuations. Moderation in commodity process (reflected in falling wholesale prices), improvement in CAD, rally in treasury yields in anticipation of peaking inflation and interest rates, and underperformance of large other Emerging Markets led to strong FII flows for India. Here onwards, outlook for inflation and earnings are generally considered key for market performance, as valuations are above average. Continuing moderation in volume growth could pose risks to earnings momentum over time.

3. What has been your investment strategy in 2023 so far? Are you planning to sustain on the same or you have a different plan?

In general, the strategy has been to focus on stock selection with a style agnostic approach, wherein we look for opportunities across growth, value and turnaround stories. We have remained benchmark aware in terms of sectors and we don’t believe in taking major sectoral calls. The focus of research effort is on understanding the businesses, the key drivers, forming a view on the key drivers and understanding the risks.

As of date, we intend to manage our funds in a similar way as it was managed in the past, with a steadfast focus on risk management. As and when we find valuation excesses in certain segments of the market, we could make necessary changes with a view to protect investors capital during that phase.

4. Not many investors are aware whether their investments are in an appropriate type of funds. Can you let these investors know about the criteria that will help them select an ideal fund for them?

Choosing the most suitable mutual funds from a vast universe of options can be a daunting task for most investors. In the midst of this challenge, it's crucial to cut through the noise and distractions and focus on what truly matters: aiming for the best long term experience in terms of returns and risks, while aligning with individual long-term goals. To identify mutual funds with the potential for long term performance, it is essential to look beyond short-term returns. A strong track record spanning more than 15, 20 or 25 years reflects a fund's ability to navigate through various market cycles, geopolitical events, and crises. It demonstrates the fund's resilience and the effectiveness of the investment team's processes, risk management policies, and a sound investment philosophy. When investing for long-term financial goals, investors should ideally prioritize those backed by extensive track records.

5. Where in the market do you still think there is value, and where do you think valuations are stretched?

With markets trading at all-time high, there are lot of excesses that have been created in certain stocks/sectors. While the headline valuations are above their long-term average, there are still pockets of opportunities in certain stocks/sectors. At the broader level, we are positive across themes. However, one should be mindful of the valuations when one enters into a particular sector/stock. As stock returns are a blend of earnings growth and valuation de/re-rating, the starting valuations become very important and that could determine the future returns.

At the sector level, we are positive on 1) Consumer Discretionary – Within consumer discretionary, we are positive on select sectors such as autos and auto ancillaries, 2) Utilities – due to attractive valuations, low thermal capacity addition over the last 5 years and reforms undertaken over the last year are also positive for the sector, 3) Communication Services – post consolidation in the sector, pricing power outlook has improved, 4) Information Technology – normalization in margins have put an end to earnings downgrade in IT sector as top line growth drivers are structural in nature, and 5) Industrials: on account of factors such as government focus on manufacturing, shift in global supply-chain, and the China+1 theme. We are negative on Consumer Staples given the growth and margin risk and excessive valuations and materials due to risk of global slowdown

DISCLAIMER: Views expressed are of Mr. Gopal Agrawal, Senior Equity Fund Manager of HDFC Asset Management Company Limited as of 25^th July 2023. The current investment strategies are subject to change. The Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Stocks/Sectors referred above are illustrative and not recommended by HDFC Mutual Fund (“the Fund”)/ HDFC AMC. The Schemes of the Fund may or may not have any present or future positions in these sectors. Readers should seek professional advice before taking any investment related decisions.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

Mr. Umesh Sharma

Vice President & Portfolio Manager – Fixed Income, Franklin Templeton India

Umesh Sharma is a vice president and portfolio manager for Franklin Templeton Fixed Income in Mumbai, India. Mr. Sharma is responsible for managing local fixed income portfolios focusing on high grade debt, closed ended scheme, and debt portion of hybrid schemes.

Mr. Sharma has over 20 years of experience in the financial services industry. Prior to his current role, Mr. Sharma was a fund manager for Religare Asset Management Company Pvt. Ltd. He also was previously with ICICI Bank, JM Financial Asset Management Company Pvt. Ltd., and UIT Asset Management Company Pvt. Ltd. Mr. Sharma joined Franklin Templeton in 2010.

Mr. Sharma holds a bachelor of commerce from Mohanlal Sukhadia University at Udaipur. He is a Chartered Accountant (Institute of Chartered Accountants of India) and a Company Secretary (Institute of Company Secretaries of India). He also finished level III for the CFA (CFA Institute, USA) in 2006.

1. If one evaluates that the interest rate hike is about to reach its pinnacle, what kind of investing strategy will you suggest to retail investors?

In an ideal situation, the yield curve plotted as a function of tenure and yields is an upward sloping figure. This denotes commensurately higher interest rates for higher duration. It must also be noted that in fixed income market interest rates and price of a debt security move in opposite direction. Considering that the interest rates are about to peak, one may look at investing in funds that have longer duration. However, much also depends on other factors such as risk appetite of investor, liquidity, investment goal, among others. For an investor with multiple goals, a ladder approach may be handy where goal-specific investment can be made in funds that match the goal horizon i.e. funds that have a defined maturity date. Alternatively, a simple solution would be to invest the contingency corpus in liquid or money market funds and for investment horizon of two years and above a medium duration product may be considered.

2. It is generally difficult to predict the numbers announced by the Fed, RBI and other authorities. Even if we read analysis from economists it is still difficult to analyze the debt markets. Can you suggest some simple ways that would help investors to understand the key drivers of the debt market?

Simply put, the key drivers of interest rates are growth, inflation and external dynamics. In India, RBI, being an inflation targeting Central Bank, looks at its inflation target of 4%+/-2%, while keeping an eye on growth. Thus, if inflation is expected to breach the target, then it is imperative for RBI to act.

Thus, in very simple terms, if growth parameters are satisfactory and inflation is under control, then expect a stable rate regime. If growth is accelerating and inflation is likely to breach the target, then expect a rising rate regime and if growth is slowing and inflation is weakening, then expect a downward trend in rates. One must remember that markets are forward looking and are typically discounting expectations with respect to these variables. Hence, one may find opportunities if one’s analyses is different from what the market has baked in.

3. What are the red flags while evaluating the liquidity of your portfolio, and what do you do when you encounter these warning signs?

We evaluate the portfolio daily with respect to underlying liquidity. The fixed income portfolios have a significant exposure (minimum 80%) to highest rated securities which are typically liquid. We also closely track the flows into/out of the funds and any concentration risks there. We also evaluate the flow into/out of the industry within similar funds. In addition, the news flow with respect to portfolio exposures is closely monitored. There is an independent risk management function which also tracks these liquidity parameters and in addition, also looks at portfolio liquidity with respect to historical redemption trends etc, among other things. The framework ensures that the funds keep aligning to changes in the external environment on a dynamic basis.

4. What kind of impact could tax amendments on debt funds have on investor participation? Do you believe that in order to encourage investor engagement, recent changes will necessitate significant product modifications?

Going by the recent data from AMFI, we haven’t seen much impact. On a YTD basis, fixed income category AUM has grown by 14%, folios have also grown by 0.25% in line with trend from previous months. Debt funds continue to offer benefits over traditional investments in the form of choices depending upon risk-return appetite, ability of schemes to reflect prevailing interest rates through portfolio yield to maturity, professional management, option to redeem investment without penalty, among others. There are certain taxation benefits also like deferment of taxation, adjustment of capital gains/losses etc.

Current regulations do not permit excessive modifications in product structures. We feel the current set of 16 funds category offer a plethora of investment solutions to investors. Beyond these, there are Fixed Maturity Plans and Target Maturity Funds as well which serve well to meet varied investor requirement.

5. How much AUM do you manage, and can you provide us an overview of the last three years' performance of the funds you directly manage?

I manage/co-manage around $1 billion AUM across fixed income and hybrid schemes. For the funds I directly manage, 67% of the funds have been in the top 2 quartiles over a 3-year time frame (regular plans; data as of 23th Jun 2023), while the balance have slight underperformance relative to peer average.

6. What’s your investment mantra and how well has it worked for you?

On the professional front, the investment mantra is to look at the data hard, glean information and use it to distill into portfolio construction. In other words, its research, conviction, and execution.

On the personal front, the mantra is to invest for the long term while keeping overall asset allocation as per my goals. One should not be deterred by short-term fluctuations and should keep an eye on the long-term.