Overrated
issuers may be the first ones to be downgraded
by Mr. Ritesh Nambiar, UTI AMC
With
SEBI tightening the norms for rating agencies, any negative news may lead to
downgrades and MFs will be very selective as far as portfolio addition is
concerned:
Outlook
on credit opportunities in the debt segment
The
credit/income opportunities category has grown over ₹1 trillion and is one of
the fastest growing segments in the debt category. Currently, credit theme is
prevailing over duration due to uncertainty over further policy rate cuts amid
rising inflation. The category has seen a good degree of upgrades and credit
spread compression over the years. HFCs/NBFCs, which form a major part of the
portfolio, have seen upgradation by multiple notches over the years.
The
challenge is the risk not being adequately compensated amid ease in the
availability of liquidity. Since credit portfolio does not have a high turnover
ratio, hence most of the portfolio gains, over and above the portfolio yield,
could remain unrealized. Moreover, credit rating migration will be limited as
SEBI has tightened the norms for rating agencies. Any negative news on the
sector or company may lead to downgrades.
Limited
gains from credit opportunities fund
The credit opportunities fund is an accrual fund.
Hence, most of the portfolio gains will come from portfolio yield.
Mark-to-market gains from here on could be limited. So, the way forward for
such funds is to ensure addition towards right issuers. Therefore credit
penetration within lower category issuers stands limited for mutual funds;
hence MFs will continue to identify newer issuers/sectors.
Performance
of UTI Income Opportunities
Short-term to medium-term credit funds fall within
the category where the duration of funds vary from 1.5 years to 4.5 years. As
the interest rate cycle has been favorable, longer-duration credit funds have
performed better than short-duration credit funds. Hence, UTI Medium Term fund
(medium-term credit product) will give higher returns than UTI Income
Opportunities fund (short-term credit product).
UTI Income Opportunities fund has a good performance
history in the short-term credit category, in terms of risk adjusted return —
which means that for the underlying risk that is taken, the returns are
superior within the category of funds.
The
dynamics of the bond market
Banks have
been helping corporates to reduce their cost of borrowing by tapping into
wholesale markets. The excess liquidity that banks were left with, post demonetization
further skewed the corporate bond spreads as bond demand far exceeded supply.
The flow of FPI into domestic bonds since March ’17 has supported the corporate
bond spreads. Steady demand from mutual funds/insurance month after month also
helped in reducing credit spreads across ratings.
Viewpoint
on the interest rate front
Globally, there is an issue which advanced countries
are not able to re-inflate, keeping central banks tentative about their rate
actions. In India, thanks to the sharp fall in food inflation, the overall
trend in consumer inflation has been favorable.
But, just like RBI, UTI believes that this could normalize
inflation head over 4 per cent by March ’18 and the room for further rate cuts
could be limited. Thus, the fixed income market from here on is much more
data-dependent.
About the author
Mr. Ritesh Nambiar, Senior Vice President, UTI AMC
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