Merrill Lynch surveyed 16-fund managers / CIOs, managing over Rs770bn in assets.in early September on their views on the market and their portfolio strategies. The fixed income markets have been discounting rate hike expectations for a few months now, the expectations have increased significantly despite the RBI indicating a 'measured' response. Of the 12 responses, 50 per cent expected the repo rate to be hiked 25 basis points (bps). One-fourth of the respondents expected a 50bp hike and the balance one-fourth chose 'cant say'. There were no respondents favouring 'no hike' or a hike of larger than 50bps.
A notable feature of the response on the market was the pessimistic long-term outlook. No fund manager was bullish over a one-year horizon, 81 per cent were bearish and 19 per cent expected gilts to remain stable. Views for the month were however relatively more bullish than the long-term views. Six per cent of respondents were bullish, 38 per cent expect gilts to be stable but the majority 56 per cent expects gilts to end weaker. There has been a sizeable shift towards bearishness despite the rise in yields.
The tightening of did not prompt more fund managers to expect
spreads to widen. The majority expects spreads to remain stable over the month with over a third expecting spreads to widen. No respondent expects a narrowing of spreads both over a month and over a year. Three-fourths of fund managers expect spreads to widen and 25 per cent expect spreads to remain stable over the year.
The prevailing uncertainty and expectations of bearishness were clearly evident in the choice of fund category by the respondents. 50 per cent ranked liquid funds as the first choice over a one-month horizon. Income and long-term gilt funds were the first choice of a fourth of the respondents. Over a one-year horizon, the ranking continued to remain skewed. 38 per cent expect long-term gilt funds to do well while this category was the last choice for 36 per cent of the fund managers. Short-term debt funds were a close second.
Fund managers plan to decrease the duration (50 per cent), decrease bond allocation (75 per cent), decrease gilt allocation (50 per cent) and increase cash levels (69 per cent) further in September in the income fund categories. In the gilt categories, 50 per cent said that they planned to keep duration stable and 44 per cent favoured reducing their gilt allocation.
56 per cent of fund managers expect economic growth to be strong and 38 per cent expect stable growth. Only 6 per cent expect a weaker economy, the change likely on resumption of monsoons that were a concern in July.
Good news for the inflation watchers, only 6 per cent expect inflation to rise, 25 per cent expect inflation to remain stable while the balance, a majority of 69% expect inflation to ease.
Exchange rate expectations have again reversed. 44 per cent of the fund managers expect the rupee to remain stable, 38 per cent expect the rupee to strengthen and 19 per cent expect the rupee to depreciate against the US dollar.
Merrill Lynch says the reversal of interest rate hike expectations amid improved market sentiment could support lower yields, but only in the short-term. The company is now more cautious over the medium term. Uncertainty and comments made by policy makers have contributed to its increased cautiousness. In the short term, volatility is likely continued and yields could back up after the recent momentum loses steam. The report recommends continuing to focus on short duration funds with no mark-to-market risk, floating rate and liquid funds
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