Tag Archives: growth

Debt Note: A New Stance

Investment Strategy:

The RBI’s stance of calibrated tightening indicates that rate hikes are possible but not mandatory. As investors, it is important to capitalize on rising yields to structure a layered portfolio. The spread between the repo rate and the 10 Year Government Security is nearly 1.5%. This presents a compelling investment opportunity as it is normally 0.5% to 0.75%.


The Background:
The last two months have been eventful for financial markets. September witnessed tight liquidity conditions, the default from IL&FS, a new milestone in the NPA resolution process, new lows for the rupee, and much more. All these factors have made bond investors wary of the bond market. Recent volatility and correction of financials in equity markets has raised investor concerns across the board.

Defaults have risen from “asset-liability mismatches”. This is when companies borrow money for long-term projects using short-term instruments to reduce the cost of borrowing. The capacity for these assets to generate cash in the short-term is limited and could trigger defaults and destabilize the financial system.

The RBI Policy:
Market consensus indicated that the RBI would raise the repo rate by at least 0.25% in its October meeting. However, they left the repo rate unchanged and modified their stance from neutral to calibrated tightening. This surprised participants, since rate hike expectations were already factored into the bond prices.

Interest rates are not the only way the central bank can stabilize markets. To address illiquidity, the RBI conducted OMO purchases and reduced the SLR [Statutory Liquid Ratio]. Inadequate liquidity creates panic and reduces financial stability.

Recent inflation prints have been below the targeted 4%. However, rising oil prices, the upcoming festive season, and increased liquidity could push it up.

The Way Forward:
It is important to note that the rupee has not been as severely affected as its peers. Domestic macroeconomic indicators remain promising. Growth has exceeded forecasts and inflation is largely contained. The real concern is to protect this stability and build resilience towards global threats. By controlling inflation, remaining fiscally prudent, creating appropriate capital and liquidity buffers, and continuing structural reforms, economic resilience can be sustained. A stable economy attracts investments and promises growth.

Managing Conviction


Podcast Transcript

How we develop conviction matters. Everybody agrees that the quality of conviction will determine many things- how we translate conviction into investments, how we allocate money into an investment, and how we hold onto the investment.


Generating conviction, growing conviction, preserving conviction and translating conviction are four important elements in conviction management. It cannot be randomly generated. It has to originate in a certain way. The origin has to be simple and powerful. One must be able to explain in a few words about how one has generated it.


Then he must manage all the negatives that prevail around his conviction. This is very difficult especially if you are the kind who builds conviction before anyone else. Building conviction demands extraordinary simplicity and clarity of thought.  Importantly, one must organise his thoughts in a certain manner. When one’s thoughts are organised in a way that raises conviction, one tends to make it a holistic ally. Generation of conviction needs a state of mind where there is little or no anxiety, complete lack of peer pressure, and just a curious approach towards ideas. In that state one is able to take a clear, calm, and composed view of things. Then, he is able to grow his conviction freely.


Growing conviction is about validation. One must seek and address negatives. At times, negatives can be forcefully thrown at conviction. While actively seeking opinions, one must carefully find honest answers, deal with the facts and not be bothered about the opinion maker.


Preserving conviction is important as companies tend to sway away from our expectations when the macros shift rapidly. But, in the I long run, macros will stabilize and our original expectations will play out. During difficult times one must be able to preserve his original conviction. This needs to happen when all around, opinions constantly change rapidly.


Translating conviction is about ensuring that one is invested during the best phases when conviction plays out. Often people can only claim to have spotted multi-baggers. They would not have held onto them long enough. This defeats the very purpose of conviction. This has to be zealously avoided. One has to hold onto conviction till the best times arrive and play out. One needs to remember that consensus will be elusive till it is almost the time for you to sell. So, waiting for consensus to ripen is the best way to translate conviction to its full potential.


Managing conviction well means all four phases must be handled maturely, patiently, singularly and solidly. It is mostly about one’s self. That can at times be almost narcissistic. But, there is no escaping that. It will always be all about you. But with a little help from friends you can do better.

Managing conviction is deeply personal. But it is also innately process driven.



Debt Markets Work In Cycles Too

In good years, defensive investors have to be content with the knowledge that their gains, although perhaps less than maximal, were achieved with risk protection in place, even though it turned out to be not needed.
– Howard Marks




Every investor scrutinizes the relationship between risk and reward before entering an investment. The risks associated with equity investments are well understood – over time, risks even out, while rewards accumulate. But, what about debt?

Markets work in cycles. People often ignore that debt works this way too. The monetary policy determines the trajectory of interest rates in an economy. Interest rates could trend downwards, bottom out and move upwards again until they peak and begin to descend. The interest rate cycle is what makes debt markets cyclical. Typically, when inflation is benign, and growth looks dull, interest rates are cut to stimulate the economy. On the other hand, when inflation rises and liquidity increases, interest rates are raised to cool the economy. Clearly, the interest rate cycle is linked to economic growth and inflation.

We can expect interest rate cycles to shorten. The RBI has a mandate to target inflation and keep it at 4% (+/- 2%). So, inflation is clearly range bound. In a growing economy like ours, inflation is the key determinant for interest rates. Consequently, even interest rates will be contained within a band.

Playing a shorter cycle requires an altogether different approach and can be quite challenging. Mitigating risk should be at the core of the investment strategy. Constructing a sensible portfolio takes time and involves a significant amount of preparation. The current market scenario may be more favourable to debt investments in terms of the risk-reward metric. Sensible allocation to debt could help construct a well-rounded portfolio.

Our focus has always been on quality. This helps us effectively manage risk. We offer solutions customized to our investor’s risk appetite and investment horizon. Our strategy involves analysing trends in the debt market and taking advantage of market volatility to construct a layered debt portfolio.

Explore your asset allocation options by fixing an appointment with our team.

Capture Emerging Opportunities

India saw the most number of economic reforms in 2017-18. It was a year when the GST was implemented, the IBC gained momentum, the NCLT saw resolutions getting nearer. More bad loans were moving towards resolution than even before. The government decisively moved on, ensuring Make in India works and DBT gained momentum across services.

Yet, we found that few investors were actually betting in sectors which would see greater traction from these reforms. Instead, markets mostly focussed on companies which were agnostic to government policy and showing steady performance. We focussed more on growth and refused to see turnarounds.

With capital goods, construction, steel, agriculture and infra likely to recover sharply on the back of sustained reforms and public investment, the market seems confused about whether it should shift its strategic outlook. The prediction of a normal monsoon has further reinforced the economic recovery theme.

It remains to be seen how market strategies are redrawn to capture emerging opportunities.