FII selling continues in the debt market!

Last updated: 17 Jun, 2020 | 04:54 pm

FII selling continues in the debt market!
  • FII investment flows are a major factor in driving the direction of financial markets in India. 
  • After record FII outflows in March amid the Covid-19 induced market crash, FII equity investments in May and June 2020 have recovered sharply. However, FII’s have continued to sell their debt investments. 
  • As of 16 June, FII outflows for June 2020 are at 2,092 crores in the debt market while inflows of 23,335 crores have been witnessed in the equity market.

Why are debt markets facing the heat?

  • Uncertainty: The lockdown has impacted the ability of businesses to service their immediate debt obligations, in turn leading to defaults in their interest payments. This has led to debt mutual funds writing down their NAVs, impacting returns.
  • Redemption Pressure: Severe redemption pressure by investors has led to a massive liquidity crunch. Banks and non-banking financial companies (NBFC’s) are one of the largest issuers of corporate bonds in the country. Most debt mutual funds, on average, have more than 40% exposure to these 2 sectors. As per a recent report released by Moody’s, these sectors are witnessing a huge asset quality deterioration and liquidity stress. The stress, especially in the non-banking sector, is increasing at a rapid rate.
  • Risk Aversion: Credit Risk Funds (which invest at least 65% of their assets in papers rated below AA+) have seen the highest outflows, as panic gripped investors following the Franklin Templeton debacle. Their size fell from around ₹48,000 crore on 24 April 2020 to around ₹35,000 crore by 15 May. 
  • Rating Downgrade: Moody’s downgraded India’s sovereign rating by one notch to Baa3 with negative outlook citing concerns about a prolonged period of slow growth. This leads to global funds adjusting their country exposure as well as a ripple effect on India’s banks and infrastructure firms, which faced rating agency downgrades as well (about 37 firms in total)

INDwealth view

  • The concerns over the rebound in the economy further underscores the need for you to stick to high-quality AAA-rated debt.
  • We expect the after-effects of the lockdown to have long-lasting effects on the economy that will leave companies with large debt levels. This will impact growth and will result in several defaults on payments going forward.
  • AAA-rated high-quality companies will be best placed to navigate this difficult economic crisis.

INDwealth analysis

  • Both equity and debt markets are expected to remain volatile in the medium term
  • Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the economic crisis
  • Stick to AAA-rated low duration funds and bonds and avoid high duration funds, and long-maturity bonds as yields will remain volatile in the near future.

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