Mr. Taher Badshah

Chief Investment Officer - Debt, Invesco Mutual Fund

Mr. Taher has over 24 years’ of experience in the Indian equity markets. In his role as Chief Investment Officer – Equities, he is responsible for the equity management function at the firm. He joins Invesco - India from Motilal Oswal Asset Management where he was the Head of Equities, responsible for leading the equity investment team. In the past, he has also worked with companies like Kotak Mahindra Investment Advisors, ICICI Prudential Asset Management, Alliance Capital Asset Management, etc. He holds Masters in Management Studies (MMS), with specialization in finance from S.P. Jain Institute of Management and a B.E. degree in Electronics from the University of Mumbai.

Q. What is your take on the interest front and how do you see it moving, going forward?

Answer: Monetary Policy Committee has clearly articulated its concern on inflation, which is reflected in retention of inflation forecasts for FY23. We believe supply side disruptions, geopolitical tensions, commodity prices & improving domestic demand conditions pose risks to inflation outlook, while the growth seems to be fairly supported by domestic factors. Anchoring Inflation trajectory remains a key priority for MPC and given the current inflation trajectory, we expect MPC to continue with front-loaded rate hikes. Additionally, with the narrative in August MPC on external global factors, we now expect a policy repo rate to reach ~6% by Dec 2022 / Feb 2023, faster than our earlier expectations of April 2023. Further rate hikes, if any will depend upon the expected inflation trajectory in FY24 which is still evolving & dependent upon geo-political uncertainty.

Besides the inflationary pressures, another key monitorable to keep a watch on is the Balance of Payment situation, which can also influence RBI’s decision for pre-emptive rate hikes. Aggressive rate hike in US has triggered a significant USD strength against many currencies including INR even as RBI has actively intervened to smoothen the volatility.

With challenging global backdrop as many Central Banks tightens the monetary policies to tame inflationary pressures, huge fiscal supply and RBI’s expected fast withdrawal of ultra-accommodative policy, we expect interest rates to remain volatile with an upward bias.

Q. Why do emerging markets’ central banks have to hike their own key rates, when the Fed does it?

Answer: USD is the key global reserve currency and FED is de-facto a Global Central Bank. FED rate hikes tighten global financial conditions and cause USD liquidity to decline. Since currencies are relatively valued vs each other based on interest rate differentials, FED rate hikes increase the interest rate differentials vs other countries causing other currencies to weaken against USD. Any sharp currency depreciation can be a cause of concern for Emerging Markets which may have USD denominated liabilities as it leads to the increase in funding cost, or as they get exposed to imported inflation being the net importers. Additionally, Emerging Market’s assets may lose relative attractiveness to the US or developed markets in case of high interest rate differentials and that can cause capital outflows. To defend the currency against sharp depreciation, emerging market central banks may have to hike their own key rates when the FED hikes to maintain a relative interest rate differentials to a desirable level.

Nonetheless, all Emerging Market Counties may not be that highly corelated to the US FED actions. Domestic fundamental strengths like healthy economy, financial stability, adequate FX reserve, trade surplus and benign Balance of Payment may help an Emerging Market’s Central bank stay independent to the global volatilities.

Q. Recession fears have risen, due to the higher prices and borrowing costs as the central banks seek to fight inflation. What are your views on it?

Answer: While a high inflation may be an outcome of a healthy economy, in real terms it has a negative impact on economic growth in many ways if it is allowed to run higher for long. Decline in disposable income can cause consumer spending to decline thereby forcing companies to go slow on capex. In addition, as central banks fight inflation by raising interest rates, financial conditions tighten and further slow-down the growth. If central banks can achieve a soft landing, then growth slow-down can cause a short and shallow recession. However, if inflation is very high and central banks are aggressive in increasing interest rates / tightening monetary conditions, growth can slow down rapidly and cause a sharper recession. 

Many developed countries currently face the recessionary fears led by aggressive tightening by Central Banks to tame inflation which is further worsened by high energy prices due to geo-political crisis. In our view, real growth may enter a recession for few countries, however nominal growth rate may still remain higher than past few years due to higher inflation. With this backdrop, as long as the job market remains healthy in terms of job openings & wage growth, we expect a shallower recession. Any further heightened geo-political risk can keep the commodity prices elevated for longer which can result in continued elevated inflation thereby increasing the chances of a deeper recession. 

Q. What parameters do you evaluate before buying a debt instrument? How easy or challenging is it compared to evaluating equity stocks?

Answer: Investing in Debt market is as easy or challenging as investing in equity market. Both the markets encompass a top-down macro view supplemented with a bottom-up company selection approach.

More specifically, we follow a disciplined and a structured investment approach for debt investments by evaluating various macro indicators like growth – inflation & demand – supply dynamics, that can have any bearing on interest rates. Selection of right credit and at an attractive valuation is very critical for portfolio construction. We believe that many adverse credit events over the last few years have forced a structural shift of investments towards high quality AAA & AA papers thereby reducing the differential in gross ytms across the peers. Accordingly, main alpha driver now depends upon the ability to actively trade upon the relative spread movement vis-à-vis each other. In order to identify such alpha opportunities, we have incorporated an in-house developed proprietary tool to capture the historical yields of all the different nature of instruments at one place which help us in analyzing the spread history of any segment. In addition to our own internal credit rating for every issuer, we have also introduced a Relative Value rating, which is based upon the credit spreads relative to the specific benchmark. This approach helps in identifying the investment opportunities on best risk-reward basis.

Q. Please share some of your key learnings from the last financial year.

Answer: FY22 proved to be yet another year dominated by Covid-19 led disruption across the world and many countries found themselves helpless against the virus. If that was not enough already, Russia-Ukraine conflict took everyone by surprise. The year was also defined as a point of inflection for many Key Central banks which made a transition from a non-conventional ultra-lose monetary policies adopted in response to the Covid-19 led disruption to a more conventional - inflation targeting monetary policy. Global Interest rates remained volatile during the year with an upward bias as the market participants struggled to gauge the inflation trajectory. Financial markets turned even more volatile as the market forces oscillated between growth disruption to inflation fears. FY22 not only tested the immunity system of people but also tested the patience of regulators, governments, and investors as well in such uncertain times. I have learnt a lot both personally as well as professionally over last year and the few critical ones are as below

• Health is the biggest wealth. Don’t compromise on health. Maintain close relationship with people you care.

• Be nimble, humble, and receptive. Market is a much bigger force and Central Banks can move the market.

• Disciplined and a structured investment approach helps in cutting the market noise. A prudent Risk framework & effective monitoring mechanism comes to the rescue in uncertain times.

• Global markets are far more connected than one can think.

• Never take anything for granted. Assign a probability to every scenario and keep re-assessing it regularly.

Q. What is your advice to the investors who have short-term goals, like parking their money for the next three to nine months or so? And to those who wish to invest for the next three to five years but don’t wish to take much risk?

Answer: Global Financial markets have been getting rattled with wide oscillations as the market participants struggle to weigh the inflationary pressures vs the recession fears in few developed economies. Despite the recent correction, Russia – Ukraine war continue to keep the global commodities much higher than pre-pandemic & with further supply side disruption, has led to a multi decade high inflationary pressure in many developed countries. While the global inflation trajectory remains uncertain especially over next few months on energy prices, many Key Central Banks are expected to continue with its aggressive policy rate hikes & liquidity withdrawal to rein in inflation. This is expected to keep the interest rate volatilities high.

Against the backdrop of many such uncertainties, we prefer using the conventional wisdom to contain interest rate risk with a moderate overall duration of debt investment portfolio. Yield curve has already flattened sharply since April 2022 with 1-2 yr segment hardening by ~150 bps while the 5 yr+ segment has hardened by much lesser 60 – 70 bps. A much flatter yield curve gives an opportunity to investors to cut down on duration risk while continuing to maintain high accrual.

We feel that 6 months to 1 year segment of the yield curve provides opportunity to risk-averse & short-term investors amidst expectations of repo rate hike going forward. Scheme categories like ultrashort, Money Market and Low Duration can be explored with short term investment horizon.

For investors looking at the core debt allocation over the medium term, the 2-to-4-year segment of the yield remains well placed from carry perspective as it has already priced in far more aggressive rate hikes. This segment is a sweet spot on the yield curve – neither too short which gets impacted by low gross yields, nor too long that can get impacted by the rate volatility. While the yield curve may further flatten to an extent going forward, duration adjusted risk-reward is favourable for this segment. Actively managed fund in the categories like Short term Fund, Corporate Bond Fund and Banking & PSU Fund will be able to keep high interest rate volatility under check while also capturing the upside potential once the interest rate peaks out by increasing duration.

Credit environment remains healthy; however, current narrow spreads of AA / AA+ over AAA bonds do not provide favorable risk adjusted reward opportunities, and we expect il-liquidity premium to increase sharply over a period of time thereby posing mark to market challenges for this segment.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.