India promise land for global fixed income investors: Kotak

In last three years there has been a major rally in fixed income. Gaurang Shah, Group Head, Asset Management & Life Insurance of Kotak Mahindra Group says globally investors are more interested in fixed income right now.

"People feel that in most part of the world rally is over and India provides opportunity to make money in fixed income", he told CNBC-TV18 in an interview. Also read: Soft capex dent cap goods Q3: Kotak tells you why He believes India is coming into favour, because for the first time in the month of January, the country dedicated funds got more money than the country ETF. Below is the verbatim transcript of his interview to CNBC-TV18 Q: You have been speaking to a lot of investors in your conference. What is the sense you are getting in terms of the India preference itself. There has been a decent flow but is there a feeling that valuations at some point will look challenging? A: By and large, the participation has been pretty good. There are two global trends happening. One, the expectation is that the developed world is not likely to grow for a considerable long period. Second, is the sector rotation. In the last three years, there has been a major rally in fixed income in global markets. Most of the people feel that it is the end of it. In the ten year US has moved up from 1.60 to maybe 1.95 to 2. There is an expectation it may move from 2.25. These are the two things chasing growth. People are moving to emerging market. If one sees how it reflects, the first lot comes into the global emerging market fund, Alpha strategy. The second one comes in to global emerging market fund, exchange trade funds (ETF). Then it comes into the country ETF and finally Country Dedicate Fund. First time, in the month of January one saw the country dedicated funds are getting more money than the country ETF. I think India is coming into a favour, but these are still early days. Q: What about the mix between debt and equity? How do you choose between how much you should allocate towards equity and fixed income? A: I think that’s a risk. If you look globally people are interested in a fixed income. Now people feel that in the most part of the world rally is over and India provides opportunity to make money in fixed income. Domestically, it's a big risk to the equity market. If one sees the growth this year, largely the expectation is that we grow between any estimate say 12-16 percent. However, in a fixed income one is going to make 10-12 percent. If one takes a duration call most of the funds are sitting on 5.5-6 duration and if the interest rate comes down as per anyone’s expectation between 50-75-100, it will still give a double digit returns. So, opportunity cost of holding equity in India is high. Maybe another year equity may do well to the extent of say 10-13 percent and the same way the bond fund also will do around 10-12 percent. Then one market has to give up and that has to be debt for a little two or three year kind of a run. Q: What sector would you back at all in equities considering that you are seeing this kind of a cap on equities itself in terms of returns? A: I am not a sector expert. Broadly, anything which is interest rate related should do well, like banking, automobile, and the number two as a hedge. The risk to the market next year is linked to each other. However, one is about our inability to fund current account. If anything goes wrong globally then Indian rupee will never sell off and that is one risk which we have. The second one is if any attempt on fiscal consolidation or interest rate comes in the economy and it is not liked by the rating agencies and people even fear the rating downgrade then there will be these two risks that you will have. So, to guard against that in the portfolio one should always have information technology (IT), pharma. Anything,  which can guard against the rupee depreciation. So, I think this is a way broadly this year will go.