Weekend Interview: Mirae Asset CIO draws pandemic lessons for investors

The Covid-19 second wave has once again caused widespread disruptions and its impact is being felt by everyone. Many investors have been caught off-guard by the volatility witnessed post-second wave devastation. In an interview with Money9, Mahendra Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers (India), shares his views on a range of issues which will have a bearing on the road ahead for investors.

Edited excerpts:

Q: Given the way the second wave of Covid-19 has caused damage, what is your view on economic growth? When will we see sustainable recovery?

Jajoo: Rewinding back to 2020, a stringent national lockdown was implemented which resulted in a sharp contraction in growth (~24% YoY decline). Compared to that, the dominant narrative this time is to keep the economic cost contained and avoid national lockdown. Even though most of the states have undergone lockdowns, some of the high frequency data (PMI- 55.4 & GST revenue at Rs 1.41 lakh crore for April 2021, an all time high) shows some stability in the economic activity. Further the unemployment rate has witnessed a minor spike and remains stable at ~6.5% compared to the major spike last year at 25%.

Procurement of wheat continues at full swing (~30% higher than last year) and supply chains are much smoother. Having said this, there has been a drop in mobility levels due to the restrictions, E-way bill generation dipped in April 11% vs the 2021 baseline, vehicle registration was down 60% vs 2021 baseline mostly due to lockdown and domestic passenger traffic slipped one third in May. This set of data suggests that even though tentative the overall loss of momentum is not as severe as the first wave. Given this while the economic growth is in the nascent stage of recovery, the recurring lockdowns bring in uncertainty. The answer to this uncertainty is speeding up the inoculation program. So far 10% of the population has been administered at least one dose and production of vaccine is set to pick up between August and December 2021 (216 crores doses has been promised). This shall bring in reasonable stability in the economy.

Q: Which way do you think interest rates are headed in the economy? Have we seen the last of rate cuts by the RBI for the immediate future?

Jajoo: The Reserve Bank of India has been facing a dilemma in:  1) managing  the  low  cost  of  capital  to  support  the  nascent  economic  recovery;  2)  keeping  rupee  stable  and  range-bound;  and  lastly , 3)  keeping  inflationary  pressures under control to ensure macroeconomic stability. At the current juncture supporting growth seems to be a priority as India is seeing a sharp resurgence in COVID-19 cases. Considering this, RBI is likely to keep the policy (repo) rate on hold in FY22E and maintain sufficient liquidity to ensure the least disruption to the government’s borrowing programme.

Q: Where do you see 10-year G-Sec yield and why?

Jajoo: Since the second wave has reset the expectations and has raised concerns, the focus is likely to shift back to growth and sustainability. Growth is more centered on Covid spread, lockdowns and restrictions and pace of vaccinations, whereas sustainability will be more focused on RBI measures and central government announcements. RBI has ensured support through operation twist, G-Sec Acquisition Programmed (G-SAP) and Targeted Long term Repo Operations (TLTROs). It has also gone to an extent of not accepting the bids in auction to maintain the benchmark levels. With conservative growth expectations, RBI is likely to intervene. Overall, considering these factors 10-year is expected to remain in the range of 5.8-6.1% over the near term.

Q: Given the current scenario, how should investors approach fixed income investments? What according to you are the best alternatives for debt investors?

Jajoo: It has been repeatedly witnessed that if an investor follows asset allocation diligently and remains invested for a full interest rate cycle he/she is likely to sail through it easily and reap the benefits of highs and lows of the interest rate cycle. Thus, for a long-term investor this scenario barely does any harm and in fact provides an opportunity to gain maximum out of this volatility.

Q: Given the possibility of sticky inflation in India, what should fixed income investors do with possible negative yields?

Jajoo: Since the start of the pandemic, India’s inflation has seen three broad drivers: (1) food led by supply-chain disruptions, (2) fuel led by higher taxes and to some extent higher crude prices, and (3) pandemic-led mixed impact on core inflation: health, fuel price-led transport prices (higher) and services, such as communication, house rents, tuition. Food inflation is unlikely to flare up unless the monsoon disappoints (expected to be normal as per IMD forecast). Fuel prices have already witnessed substantial uptick and are witnessing a slowdown in price increase. Core inflation is impacted by Covid which will be determined by the pace of vaccinations. While the major factors are taken care of, core inflation might stay sticky but the overall headline inflation is expected to be well within the RBI target range.

Q: As the government is going to borrow a significantly large amount of money, what would be the impact on small saving schemes?

Jajoo: Even though the government has announced a large borrowing program, RBI has actively managed to keep borrowing cost low and ensured adequate liquidity in the system to keep up with the supply. The small savings rates are linked to the market borrowing rates and are likely to be aligned with the market rates.

Q: Is it a good idea to invest in credit risk funds at this juncture as yields are very low in banking and PSU bond funds and corporate bond funds?

Jajoo: After the NBFC crisis, an essential learning has been that credit risk is permanent whereas interest-rate risk is temporary. Therefore one always needs to be vigilant about credits. As far as interest risk is concerned there could be ups and downs but staying invested for the longer period of time has reduced that risk significantly. Therefore, one of the most important lessons has been, whenever in doubt, remain invested for the long term and avoid credits.