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Tuesday, November 28, 2017

SEBI tightening the norms for rating agencies, any negative news may lead to downgrades

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

SEBI tightening the norms for rating agencies, any negative news may lead to downgrades Reviewed by S. Chitra on November 28, 2017 Rating: 5 Overrated issuers may be the first ones to be downgraded by Mr. Ritesh Nambiar, UTI AMC With SEBI tightening the norms for rating a...

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