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  • MF News ‘On a 25 year basis debt has outperformed equity’ says R Sivakumar

    ‘On a 25 year basis debt has outperformed equity’ says R Sivakumar

    R Sivakumar, Head - Fixed Income, Axis MF talked about the opportunities and risks in fixed income markets at Cafemutual Confluence 2018.
    Shreeta Rege Dec 29, 2018

    Sivakumar started the presentation with a quiz asking the audience which asset class has performed better equity or debt in the last 10 years. Sharing historical data, he informed the audience that until earlier this year debt was a clear winner. However, post the volatility in debt markets in September, equity has caught up with debt. Looking at an even longer term, of 25 years and comparing the performance of Nifty v/s g-sec the results do not change, he said. Debt outperformed equities over the 25-year period (based on data until August 2018). In short, debt has kept pace with equities in terms of returns for 25 years, yet we treat debt as a poor cousin of equities, he quipped.

    However, on a rolling return basis the results are not so straightforward he acknowledged. In the short-term (5 years), equities outperformed debt 51% of times. The odds turned more in favour of equities over a 10-year period where equities outperformed debt 69-70% of the time.

    Through this data, he wanted advisors to realise that if they do not advise debt allocation in client’s portfolio they are denying their clients of a fantastic investment opportunity.

    Next, he talked about the currency related fears plaguing the debt market. He praised RBI’s decision to not defend currency through change in interest rates. Sharing data from other economies like Indonesia which has raised rates multiple times this year and Argentina whose overnight rates stands at 60% he pointed out that high rates do not necessarily translate into foreign investment, which in turn is believed to help in currency appreciation. In short, he feels that there is no link between bond yields and currency.

    He further urged the audience to not get bogged down by short-term data on rupee and instead look at medium term values. Based on the five year numbers, while, rupee has depreciated by 10%, it is still amongst the strongest currencies in the world during the period. Sharing data from International Institute of Finance conference in Bali in October, he showed that US$ is the strongest currency in the world followed by the Indian Rupee. According to him, investors should not worry too much about Rupee, as we are Rupee investors investing in Rupee assets. Currency movements only affect returns of foreign investors.

    However, he did cite fiscal position as a key risk.  He shared that the banking system is stuffed with government securities. Banks had g-sec investments in excess of Rs. 10 lakh crore above the RBI mandate. Thus, banks are not rushing to buy more g-secs.

    On a positive note, he shared that the banking system NPAs are decreasing. Overall, the credit quality of the system is improving with companies reporting better operating margins, lower operating expenses and better interest coverage ratios.  He added that most of today’s issues stem from 2010-2012 loans and are just being recognised now.

    He further shed some light on the IL&FS issue by pointing out that IL&FS is a road and energy company not an NBFC in the true sense of the word. RBI classifies it as an NBFC as it is a CIC (core investment company). A CIC is essentially a passive holding company mainly investing in its group businesses. The holding is meant to ensure control over the group of companies.

    He shared that in the recent past there have been higher number of upgrades than downgrades. However, by value the number of downgrades are higher as many heavily indebted big companies have been downgraded.  Still he feels that a fund manager can ignore these names. Today, a debt fund manager has more variety in terms of issuers thanks to these upgrades.

    He concluded the presentation by pointing out that the recent issues such as liquidity crunch, credit scare have resulted in both credit papers and corporate bonds being available at attractive yields. He urged advisors to consider debt as an asset class as it is available at low valuations and diversify their clients’ investments across asset classes and funds.

     

     

     

     

     

     

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    1 Comment
    Dayananda P K · 5 years ago `
    Comparing DEBT and EQUITY asset classes is like comparing orange and apple.
    Agree with having DEBT Asset class in portfolio, but sceptical about Debt outperforming EQUITY.
    As a layman , I interpret that there is something basically WRONG in the economy if Debt outperforms EQUITY.
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