Debt returns competing with equities: CIOs of MF houses at BFSI Summit

Naren said after a long time the need for money in the deposit market has come and we see hikes in bank deposit rates

Debt is giving a tough competition to equities as major central banks unwind their monetary easing and rate hikes, chief investment officers (CIO) of mutual fund (MF) houses said at the Business Standard Insight Summit on Thursday.

“Debt is becoming a more structural asset class...From 2008 to 2021, there was continued monetary easing. Debt is now becoming a competition to equity,” said S Naren, CIO of ICICI Prudential Mutual Fund.

After a long time, the need for money in the deposit market has come and the banks have raised deposit rates, he said. “That has played a bigger role in the attractiveness of debt than any bearishness in equities,” said Naren.

R Srinivasan, CIO of equity at SBI Mutual Fund, said equity valuations were elevated and on a short-term basis (one to three years) investors should plough more money into debt than equity. “Our house view is negative on equity because the valuations are too high,” Srinivasan said.

Rajeev Thakkar, CIO of PPFAS Mutual Fund, said a time correction was possible in the stocks of both quality and loss-making companies in the next year.

“Investor mindset has been buying the dip. And the central bank has been pumping liquidity and cutting interest rates. Now we are facing the consequences of that. We have a generation that hasn’t seen a downturn in equity markets for a sustained period. People are overweight on equities. I don’t think people are in for the long haul,” Thakkar said.

Thakkar said there were signs of nervousness. “People who don’t have a risk appetite should look at asset allocation. Investors are accustomed to central banks bailing out the market and dips being recovered, and many have not seen an extended period of a downward or sideways market.”

On being asked about how the pandemic changed investors and markets, the panellists said a generation of investors who entered the market during the pandemic has never seen a significant downturn.

“... past two years have barely seen negative returns and the Midas touch is playing on the investor’s minds. There is a marked high-ended optimism that retail investors pumped into the market,” said Lakshmi Iyer, CEO, of Investment Advisory, Kotak Investment Advisors.

Naren said there was a rise in active trading during the pandemic and traders are sitting on profits. “The initial timing was great as they picked when the valuations were cheap,” Naren said.

Iyer said the tolerance to market volatility has increased post-pandemic.

Stressing the need for anchoring investment decisions to sound logic, Naren said the benefits of rational decisions would take some time to manifest.

“...most of the time rational decisions look illogical today but the benefit is seen years later. In 2020, when we said PSUs are attractive people asked us how we can make money in PSUs. But today the prices are much higher than when we pushed them as investment ideas. Today people are asking if there shouldn't be more PSU stocks,” Naren said.

“In 2021, people said all you need is sales not profits, and investors are suffering now,” Naren said.

On being asked about their outlook for the Budget, the panelists said they don't foresee any negative surprises.

“Whatever the direction the government had in the last Budget in terms of development and infrastructure will continue. Revenues have been fairly strong and there is room to manage higher expenditure on account of higher fuel prices. I don’t see any negative surprises, except perhaps from a taxation point of view,” said Mahesh Patil, CIO of Aditya Birla Sun Life Mutual Fund.

Naren said the scope of radical changes in taxation does not exist anymore unlike in the 90s.

“We need to incentivise financial savings in debt if something happens there it will be useful,” Naren said.

Iyer said the Budget does not have to change the outlook for asset classes. “Asset classes deliver returns in patches and are agnostic of a monetary policy or Budget."

Regarding their wishlist for regulatory changes, the panelists stressed the need to facilitate a vibrant debt market. “Why we haven’t managed to create a vibrant debt market is something that baffles me. We need some tax concessions for trading in debt,” Naren said.