(This Jan. 9 story has been corrected to fix AUM of Nuvama Wealth Management in the fourth paragraph after the fund issued a correction)
By Bhakti Tambe
MUMBAI (Reuters) - Indian investors are looking to increase the proportion of debt in their portfolios on expectations of a peak in policy tightening, a desire to lock in high yields and as a diversification from expensive stock markets, analysts and fund managers said.
Debt investments offered barely any increase in returns last year amid high volatility due to the Ukraine war, aggressive rate tightening by the U.S. Federal Reserve and the Reserve Bank of India, along with steep global inflation.
Meanwhile, returns stagnated in 2020 and 2021 with low yields, after the pandemic led to massive rate cuts.
"People are getting a sense that we are reaching a peak of the rate (hiking) cycle," said Alok Saigal, head of Nuvama Private, unit of Numava Wealth Management which has 27 billion rupees ($328.67 million) of assets under management.
"We are actually getting incoming demand from clients asking us for opportunities or avenues where they can lock in yields, where they can allocate a reasonable amount of money to fixed income," he added.
The 10-year government bond yield has risen 87 basis points (bps) in 2022, whereas AAA-rated benchmark short-medium corporate bond yields moved up 150 - 200 bps.
As company valuations jumped over the last two years, the opportunity cost of investment in equities has risen, leading to incremental fund flows to debt markets.
Equity markets, particularly in India, performed exceptionally well over the last three years as domestic investors plowed savings into stocks amid negligible or even negative returns from fixed income assets due to low rates and high inflation.
MOVE FROM EQUITIES INTO FIXED INCOME
The gross yield-to-maturity of debt mutual funds has moved up to 6.75-7.75% versus 4.5%-5.5% in 2021, offering a "very good" entry point for investors from a medium-term horizon, said Unmesh Kulkarni, managing director and senior advisor at Julius Baer India.
With inflation continuing to stay high globally and the risk of sustained rate hikes from global central banks pushing economies into a recession, 2023 is likely to be challenging for equity markets.
"Poor global economic growth is not very good news for equities," V.K. Vijayakumar, chief investment strategist at Geojit Financial Services said.
Vijayakumar said he expects fixed income assets, including government and corporate debt, to offer more than 8% returns this year, against less than 6% in 2022.
Nuvama's Saigal said returns could go above 10% if investors are willing to take risk and hold on longer in their portfolios.
POTENTIAL HEADWINDS
While 2023 seems relatively better for fixed income in India, it is not without its share of uncertainties, analysts said.
Even as the RBI is expected to ease the pace of rate hikes going forward, global central banks may be unrelenting given the stubbornly high inflation.
"The global situation is the most relevant risk at this point in time," Julius Baer's Kulkarni said.
"This could constrain the RBI from pausing too early, as any compression in the interest rate differentials could adversely affect flows into Indian debt markets and also put pressure on the INR, which has already suffered heavily over the past year."
($1 = 82.3310 Indian rupees)
($1 = 82.1500 Indian rupees)