How Does One Read the Credit Policy Review

Whew, RBI Policy Review is behind us. Though there was an unpleasant surprise of 75 bps CRR hike (against market expectation of 50 bps) & there was knee jerk reaction in the equity markets (corrected by more than 300 points post the announcement before settling down & currently (2:20 PM) only 13 points down on the SENSEX), debt markets showed more restraint. 10 year 6.90%, 2019 went up marginally to 7.73% (pre policy levels of 7.69%), it has settled back at around the same levels. Also, against market expectations of short end of the yield curve going up, there has been only marginal move of 2-3 bps in this segment of the curve. 3 year paper of PFC which was traded at 7.48/50 % levels pre policy has marginally moved upto 7.50/52% & 5 year PFC has moved up marginally from 8.28/30% levels to 8.30/32% levels.

Though short and medium term rates have not moved up today, the same will start inching up closer to dates of CRR hikes in February. Same will be the case when advance tax outflows kick in during March 2010. This is the time when yield curve will start to flatten from its current steepness (when 1-5 year yields will start moving up). Long end of the curve is (as expected) not likely to be impacted so much.

What were the key announcements & Forecasts?:

How does one read into RBI’s move of increasing CRR by 75 bps & not touching the benchmark rates?

What are the milestones post this Policy Review which can affect the debt markets?:

Hence, I see this Policy as a sigh of relief as immediate negative news is behind us (without impacting markets too much). Also this should give some insight into the mind of RBI (wherein they wish to see accelerated growth) & hence may not be in a real hurry to increase rates.

Impact of this liquidity tightness during February (when CRR hike takes effect) & advance tax outflows happen in March 2010, will be reflected in Short Term Plans for a short period of time. This asset class will have some negative impact before bouncing back post March 2010. On the other hand, if fiscal numbers for next year are on the positive side (with an assumption that RBI might not raise rates in hurry to achieve accelerated growth), long end of the curve should start rallying post March 2010. Another factor which can impact the long end positively is that Govt has almost finished their borrowing programme for the current year.

 

 

Follow up note to the NFO of AXIS Short Term Plan

Thank you all for investing & supporting the NFO of AXIS Short Term Plan which closed on January 20’2010. The said NFO collected a decent sum of close to Rs.300 crs. As was discussed with most of our investors, 50% of these funds are already invested in 2-5 year corporate bonds & balance 50% is invested in CPs/CDs & cash.

As per the offer document, of the above, upto 30% of the portfolio will stay invested in less than one year maturities. Also, the Fund Manager has taken a tactical call of investing another 20% (out of the allocation earmarked in CP/CD as the same was giving higher carry than parking under CBLO) of the portfolio in medium term debt of 2-5 year segment post the Credit Policy Review tomorrow. If the RBI hikes benchmark rates, he will be able to capture that higher carry.

Inspite of the fact that only 50% of the portfolio is invested in corporate NCDs of 2-5 years, the said portfolio has captured a very decent yield of 6.29% with average maturity of close to 1.75 years. Post the policy, the Fund Manager hopes to increase the Average Maturity to 2 years with gross yield between 6.50% to 6.75%.

Current attributes:

RETURNS SINCE INCEPTION I.E. FROM JAN 20 TO JAN 27: 6.73% p.a.

 

 

An Alternate Asset Class between Liquid Plus & Short Term Plans

As is the practice every year, there are rumours once again circulating that Government might increase Dividend Distribution Tax (DDT) on debt schemes (other than Liquid Schemes- which already attracts higher DDT of 28% v/s 22% in other debt schemes) in the current Budget to be announced in February 2010. Also, there is a fear of notification coming into effect from SEBI to Mark to Market every security with more than 90 days of maturity (currently only non Money Market Securities of more than 180 days needs to be MTM & rest can be on accrual basis).

Both the above will have negative impact on debt markets on two counts viz:

In such a scenario, an asset class which is emerging as an alternative to liquid plus schemes with 1-6 month investment horizon  are those schemes which are lower in average maturity than Short Term Plans ,with higher accruals & lower MTMs. One such scheme which I had recommended on January 5’2010 was Kotak Bond Short Term Plan.

Another scheme which falls in the same category between Liquid Plus & Short Term Plan & with a very sound track record since 2002 is Templeton Floating Income Fund-Long Term-Institutional Plan. The said scheme with an exit load of 15 days can go upto 25-30% in MTM and has still managed to beat CRISIL Liquid Scheme benchmark on 15/30/90 day rolling returns without going negative on any single rolling return analysis.

This scheme is very well poised to plug the vacancy which might get created if any one of the above or both of the above rules become applicable in the near future viz. increase in DDT in debt schemes & /or notification to do MTM on papers with maturities higher than 90 days.

Other Scheme Attributes:

 

 

15 Day Rolling Returns v/s Benchmark Liquid Fund CRISIL Index*:

*As per data given by Franklin Templeton Mutual Fund

Based on above figures and possibility of some regulatory changes as mentioned above, I would recommend investors to look to invest in the said scheme with at least one month plus investment horizon.

 

 

Article in Economic Times Delhi

SOURCE : Economic Times – Delhi – Page 11 – 18 January 2010

Axis Short Term Plan : NFO

As mentioned in my earlier notes, too much negative news is already priced into the debt markets. The same is reflecting in 10 year benchmark hovering around 7.63% levels & also in the 3-5 year corporate bond rates.

Markets have started discounting rate hikes coupled with CRR hike. However, most of the bankers & Mr. C. Rangarajan (Economic Advisor to PM) are of the view that to curtail inflation, RBI needs to suck out excess liquidity through CRR hike rather than tampering with benchmark rates in the near future. They also predict that even if there is monetary tightening in the near future, it might not result in rate hikes by the banks (due to excess liquidity & lower credit offtake).

Any effort by RBI to curtail liquidity in the system is constantly getting offset by huge FOREX flows on account FII inflows. Almost $17 bln had been pumped during 2009; causing the local currency to rise by almost 10% from its low it touched in March 2009 of Rs.52/$.

Also, Q2 growth of GDP numbers was mainly fuelled by the Fiscal Stimulus provided by the Government. If one removes the impact of this stimulus on GDP numbers, actual growth would come down by almost 150-200 bps on the lower side. This fact will also not be lost on RBI as & when they think of raising interest rates to curb inflationary pressures.

As the data shows, inflationary pressures are more to do with failed monsoon & its impact on agricultural produce rather than the manufacturing sector. Hence, since the inflation is more attributed to supply side issues; this once again gives credence to no rate hikes in the January policy.

AXIS SHORT TERM PLAN NFO LAUNCH- A RIGHT PRODUCT AT THE RIGHT TIME:

Keeping in mind the above background of current & future scenario of debt markets & various expectations by different market participants it is once again a good time to take some interest rate calls & duration calls in your portfolio; especially in the 3-5 year corporate bond segment.

AXIS Mutual Fund is likely to launch in the month of January 2010 NFO of AXIS Short Term Plan. With the current status of debt markets & high liquidity with low credit offtake, the said NFO can be compared (in terms of timing) to launching an equity Fund at a SENSEX of say 10000. As one can’t go wrong by investing in such an NFO, I would assume that one can’t go wrong by investing in an NFO of Short Term Plan of AXIS Mutual Fund (with at least 6 month investment horizon) as most of the negative factors are already priced in with additional following reasons adding credence to the investment story:

Spreads between 1 year & 5 year corporate bonds are at an all time high. Before the hiking cycle started post October 2004, market had already priced in these hikes (which RBI delivered over a period of time). The spreads actually came down.

1-5 year Corporate Bond segment also is very steep & is likely to benefit due to :

As can be seen from above, timing of the NFO of AXIS Short Term Plan could not have been better. Even if there are rate hikes in the Credit Policy Review slated on January 29’2010; the Fund Manager will be in a position to capture the same while building the portfolio. The said NFO is likely to collect funds before the Credit policy Review & hence will help him start on a clean slate without any baggage of the past.

As is likely, the said scheme is likely to have an average maturity of 2-2.5 years & is likely to capture high gross yields (based on current market rates) of more than 6.5%. This will help the investors capture both high accruals & capital gains with at least 6 month investment horizon.

Investors in the NFO of AXIS Short Term Plan will have the added advantage of no exit load (if invested during NFO period). This is not say that the investor should exit before March 2010. I would personally advise clients to invest with at least six month investment horizon; however, if one sees decent returns in their portfolio post March 2010, one will be free to exit before six month period (if investment done during NFO) .

I would strongly advise you to look to invest in the said NFO with a view to earn decent returns over six month investment horizon.