IO’s Insights: Fixed Income Portfolio Management...Investment in Debt Fund –the other side of...

CIO’s Insights: Fixed Income Portfolio Management

By Mahendra Jajoo, CFA16th April 2020

Webinar

Mirae Asset Financial Group

Session Framework

INVESTMENT

Risk Management


Impact of Covid-19

What has

changed “FOR”the investor

What has

changed “IN”the investor

EVERY - thing NO - thing

✓ Global Macro

✓ Economy

✓ Growth

✓ Valuations

Greed/Fear

Cognitive Bias

Scrying

Impatience


Key Drivers affecting Interest rates

Domestic

Inflation

Liquidity

GDP Growth

Fiscal

Credit Growth

Crude oil &

currency

Global

Central Bank Policy

Growth Outlook

Geo-political Scenario


Strong policy tailwinds, though macros face unprecedented challenges

•Retail inflation well RBI target at 6.58 in March’20 but sharply lower than recent 5 year high of 7.59%

•Spike in retail inflation primarily attributable to higher food prices

•Core Inflation at 4.25% led by transport & mobile tariff revision

•RBI’s withdraws projection in view of present uncertainty

•Progress on coronavirus containment to be the key

Inflation

•Q3FY20 GDP growth at around 6 year low of 4.7%

•CSO projection for FY20 at 11-year low of 5.0%

•Coronavirus Pandemic has invalidated all estimates

Slump in GDP Growth

•RBI sympathizing with fiscal slippage to support growth

•RBI shifting its stance from a traditional central banker to Fed style aggressive stance with a huge rate cut in late March

•Focus on rate cut transmission through tools like LTRO & Operation twist

Highly supportive Monetary Policy

•Budget deviated from fiscal consolidation roadmap of 3.3 to 3.8% for FY20➢ 11mFY20 actuals at 135% of ₹ 7.67 trillion

•Fiscal deficit for FY21 pegged at 3.5%

•Market tolerance for fiscal expansion high due to slowing growth

•Again, coronavirus has made it nearly impossible to estimate

Fiscal Deficit

•Co-ordinated Global Central Bank easing underway

•US10Y benchmark likely to enter negative territory

•ECB re-starts Quantitative Easing

Global Central Bank Policy

•Global growth likely to slowdown in the view of corona outbreak

Growth Outlook

•OPEC-Russia fall out

•US-China Trade tensions

Geo-political Scenario

Source: Bloomberg as on 6th April , 2020


Debt Outlook

GDP Growth • Growth to be priority and focus area for the policy makers currently

Fiscal • Market tolerance for fiscal expansion high due to current scenario

Crude Oil &

Currency

▪ Crude Oil prices are now highly favorable

▪ Currency may remain volatile

Credit Growth ▪ Credit growth remains low

Inflation ▪ Near term inflation outlook remains benign

Liquidity ▪ Liquidity expected to improve further

Central Bank

Policy

• Fed rate cut to zero and Co-ordinated Global Central Bank easing underway

• US10Y benchmark likely to enter negative territory

Geo-political

Scenario • Trade Wars and OPEC- Russia fall out will negatively impact Growth

Growth Outlook ▪ Likely to slowdown in the view of lockdown due to covid-19 outbreak

Domestic - Neutral Outlook

Global - Positive Outlook



Debt Outlook

• Disruption caused by ongoing coronavirus crisis and consequent expected slowdown in

economic situation has resulted in huge FPI selling and redemptions in mutual funds leading

to sharp spike in bond yields.

• Across the globe, central bankers are reacting to this pandemic with massive rate cuts and

liquidity injection to stabilize financial conditions.

• RBI has also taken several measures including rate cut by 75 bps, CRR cut by 100 bps, rise

in MSF, TLTRO, LTRO, Dollar sell/buy swaps and OMO purchase of govt bonds which will

help retaining some stability and optimism in debt markets and will help in easing any

resultant financial dislocations as well as keep the funding channels working.

• RBI liquidity measures will inject liquidity of Rs 3.74 lakh crore to the system. The liquidity

measures are positive for the bond markets. We expect more actions from RBI in coming

times including further rate cuts.

• Once things settle down, we expect

o bond yields to further move lower.

o The activity in the high credit corporate will regain normalcy.



Debt OutlookPolicy tailwinds likely to overshadow macro headwinds

• Global central banks on coordinated easing mission

• Projection for FY20 GDP /Fiscal deficit/Inflation no longer relevant currently

• RBI stand committed to act and do whatever is required

• RBI adopting new tools to support growth

• Market tolerance to fiscal expansion is high

• Oil prices are now highly favorable due to OPEC-Russia fall out

Though

• Credit concerns likely to get aggravated

• Large supplies of fresh bonds a concern

Market action

• Govt. bond yields likely to ease further from the current levels

• 1-3 yr AAA corporate bonds appear to be attractive value zone



Investment Framework

Rebalancing of portfolio following the changes in interest rate

outlook

Changing exposure to longer or shorter maturity bonds

Changing composition between Government bonds and Corporate bonds

Invest predominantly in high rated instruments


Investment Positioning

• Rebalancing of portfolio in line with evolving interest rate outlook by changing exposure to longer or

shorter maturity bonds and composition between Government bonds and Corporate bonds.

• Macaulay duration of the portfolio is based on the view of the domestic and global scenarios.


Fund Positioning

Interest rate outlook

Market Positioning

0 1M 3M 6M 1Yr 3Yr 5Yr 7Yr

Overnight Fund

Liquid FundUltra Short Duration Fund

Low Duration Fund

Medium Duration Fund

Long Duration Fund

Expected Return

MMF

Short Duration Fund

Dynamic Bond Fund

(Risk)Very Low Medium to High


Fund Positioning

Interest rate outlook

Market Positioning

Credit outlook

Fund positioning remains unchanged Market conditions will keep on changing

CashManagement

Fund

Savings Fund Short TermFund

DynamicBond Fund

3-12 Months

12-30 Months

Above 30 Months

Inve

stm

en

t

H

ori

zon

CashManagement

Fund

Savings Fund Short TermFund

DynamicBond Fund

3-12 Months

12-30 Months

Above 30 Months

Inve

stm

en

t

H

ori

zon


Comparative Returns

Source: Bloomberg as on 6th Apr 2020 & CRISIL Monthly Index Dashboard (February end)

1 yr: 25.41%3 yr: 8.94%5 yr: 6.07%

1 yr: (4.94%)3 yr: (7.65%)5 yr: (3.35%)

1 yr: 3 yr:

5 yr:

Dynamic Debt1 yr: 13.24%3 yr: 8.20%5 yr: 8.54%

ST Bond1 yr: 10.62%3 yr: 7.91%5 yr: 8.28%


NPS Scorecard

Source: Economic Times (26th Mar 2020)

✓ ✓


Investment in Debt Fund – the other side of story

If You would have invested in Equity and Debt both as Lump Sum and SIP

Equity(Sensex TRI)

Debt (Crisil Composite Bond Fund)

Time Period

Apr’18 to Mar’19 18.77% 16.15% 6.78% 10.14%

Apr’19 to Mar’20 -23.25% 0.00% 12.89% 12.25%

Apr’18 to Mar’20 0.75% 0.00% 8.11% 9.86%

Lump sum SIP Lump sum SIP

Ace MF : 31st Mar, 2020. Past Performance may or may not sustained in future.


Comparable Returns

Source: ACE MF as on 6th Apr 2020 The data is pertaining to performance of the category and does not indicate performance of any individual scheme

Credit Risk FundSummary 3m 6m 1y 3yAverage 5.77 6.05 2.18 4.18Maximum 24.51 17.49 9.22 7.74Minimum (100.2) (48.73) (42.73) (14.83)

GiltSummary 3m 6m 1y 3yAverage 9.92 6.94 11.28 7.26Maximum 14.19 10.23 14.26 8.80Minimum (90.05) (38.96) (15.40) (2.77)

Dynamic BondSummary 3m 6m 1y 3yAverage 8.76 7.63 8.85 6.41Maximum 14.49 10.95 13.17 8.40Minimum (18.15) (14.84) (5.33) 0.69

Short DurationSummary 3m 6m 1y 3yAverage 7.37 7.55 7.77 6.73Maximum 15.52 12.67 9.24 7.88Minimum (25.06) (11.90) (11.73) (0.13)


Impact of the credit market crisis

Increased uncertainty & risk aversion

Significant slowdown in fresh

credit disbursement by

NBFC sector

Flight to safety*Prime Issuers: Continue to raise money*Non Prime issuers: Exposures continue to decline every month

Most of the investments

coming into the short term

bucket

Entity

Short Term (3m) Long Term (3 yr)

Pre CrisisPost Crisis

Pre CrisisPost Crisis

Peak Current Peak Current

NBFC

Prime 86 73 66 110 128 95

Non Prime 152 262 253 187 783 743

Manufacturing

Prime 70 53 46 127 143 95

Non Prime 100 240 175 124 331 209

(i) Spread in bps (ii) 3m vs 3m T Bill (iii) 3 yr vs 3 yr G-Sec (iv) Pre crisis refers to July’18, post crisis current February’20 & post crisis peak Aug-Sep’19


Inflation: A pain point

Source: Bloomberg as on 6th Apr 2020

Home

6.58

4.08

1

2

3

4

5

6

7

8

CPI Core CPI

Mirae Asset Financial GroupSource: Bloomberg as on 6th Apr 2020

32.97

19

29

39

49

59

69

79

89

Brent remains supportiveHome


Fiscal deficit – remains a challenge


(2.5)

(6.0)

(6.7)

(4.9)

(5.9)

(4.9)

(4.5)

(4.1)(3.9)

(3.5)(3.5)(3.4)

(3.8)(3.5)

₹ 2

.69

tn

CAD narrows sharply

(1.3)

(2.4)

(2.8)(2.7)

(4.2)

(4.8)

(1.7)

(1.3)(1.1)

(0.6)

(1.9)(2.1)(2.0)

(0.9)

(0.2)

(100.0)

(90.0)

(80.0)

(70.0)

(60.0)

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

-

(6.0)

(5.0)

(4.0)

(3.0)

(2.0)

(1.0)

-

CAD-RHS CAD-LHS

Home

₹ 7

.67

tn

10.36 tn

Data.xlsx


Slump in GDP growth


4.7 5.1 5.0

5.8

6.6

7.1

8.2

7.7

7.2

6.3

5.7 6.1

Q3

FY2

0

Q2

FY2

0

Q1

FY2

0

Q4

FY1

9

Q3

FY1

9

Q2

FY1

9

Q1

FY1

9

Q4

FY1

8

Q3

FY1

8

Q2

FY1

8

Q1

FY1

8

Q4

FY1

7Credit Growth continues to slump

6.11

3

5

7

9

11

13

15

17

Feb

-15

Oct

-15

Jun

-16

Feb

-17

Oct

-17

Jun

-18

Feb

-19

Oct

-19

Home


Fed adopting shadow QE tools


0.25

0.6619

0

0.5

1

1.5

2

2.5

3

3.5

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

Sep

-19

Mar

-20

Fed Rate US10YR

India 10Y likely to ease further

6.305

6

6.25

6.5

6.75

7

7.25

7.5

7.75

8

8.25

Oct

-18

Feb

-19

Jun

-19

Oct

-19

Feb

-20

Home


Liquidity continues to remain well in surplus


(3,000)

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20

Home


“No points are awarded for DIFFICULTY or

CoMpLeXiTy. SIMPLE strategies can lead to outstanding returns.

- Morgan Housel

Mirae Asset Global Investments

Thank You

24

Disclaimer

Statutory Details: Trustee: Mirae Asset Trustee Company Private Limited; Investment Manager: Mirae Asset Investment Managers (India) Private Limited (AMC); Sponsor: Mirae Asset Global

Investments Company Limited

The information contained in this document is compiled from third party and publically available sources and is included for general information purposes only. There can be no assurance and

guarantee on the yields. Investments in the sectors may or may not remain the same. Views expressed by the Fund Manager cannot be construed to be a decision to invest. The statements

contained herein are based on current views and involve known and unknown risks and uncertainties. Whilst *Mirae Asset Investment Managers (India) Private Limited (the AMC) shall have no

responsibility/liability whatsoever for the accuracy or any use or reliance thereof of such information. The AMC, its associate or sponsors or group companies, its Directors or employees accepts

no liability for any loss or damage of any kind resulting out of the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and

seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Any reliance on the accuracy or use of such

information shall be done only after consultation to the financial consultant to understand the specific legal, tax or financial implications.

* Securities and Exchange Board of India (“SEBI”) vide its letter dated November 20, 2019 bearing reference no. SEBI/HO/IMD/DF5/OW/P/2019/30719/1 (“SEBI NOC”) had granted their non-

objection to transfer the AMC Business from 'Mirae Asset Global Investments (India) Pvt Ltd' to 'Mirae Asset Investment Managers (India) Private Limited'. Kindly refer notice cum addendum no.

AD/28/2019 dated November 25, 2019 for further details.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

For further information about other schemes (product labelling and performance of the fund) please visit the website of the AMC: www.miraeassetmf.co.in

Please consult your financial advisor before investing

http://www.miraeassetmf.co.in/

Mirae Asset Global Investments

Thank You

25

Disclaimer

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Mutual fund investments are subject to market risks, read all scheme related documents

carefully.

Please consult your financial advisor before investing

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