In Conversation with Ritesh Jain

Editor’s note:

Nobody knows what the world is going to look like after the Corona episode ends. However, as capital markets are forward looking, investors need to stay ahead of time in analysing the investment climate and taking informed decisions. During such phases, experience comes into play.

For the benefit of our readers and the entire investor community, we recently interacted with one of India’s best fund managers and mutual fund CIOs, Mr Ritesh Jain. We highly appreciate him sharing his thoughts at this time of uncertainty.

In his investing career of over 20 years, he assumed senior roles which includes CIO—BNP Paribas Mutual Fund and Tata Mutual Fund—wherein he managed USD 1.2 billion and USD 6.0 billion, respectively.

Amongst many national and international awards he won as a fund manager, CRISIL CNBC TV18 Award, Business World Debt fund manager of the year award in 2011 and Lipper Best Bond Fund of the year (4 years in a row) are noteworthy.

A blogger himself (http://worldoutofwhack.com/), Mr Jain is now a trend watcher and global macro investor. His mantra is to Make sense out of chaos.

We share with you here his candid perspectives and hope it enables you to take well informed decisions after doing your own analysis.

1. It’s feared that Corona outbreak is likely to have a protracted impact on the global economy, especially on countries that depend heavily on tourism and crude oil exports. How do you read this situation? Any canary in the coal mine?

There are 380 million people worldwide who work in tourism and allied activities which is equal to 10% of the global work force. In Europe, tourism is a bigger part of employment and GDP than some other parts of the world hence some economies will be hit more than others.

But it is a dual problem, of massive bankruptcies and ensuing unemployment. In case of crude oil, you will be surprised to know that the U.S. is very highly exposed because a large contribution to its GDP growth in the last 5 years was due to ramping up of shale. Shale companies are also heavily indebted and have a higher cost of production than traditional oil; hence you will see U.S. GDP getting negatively impacted because of low oil prices. Middle East is also in serious trouble because they need almost $80 on oil to balance their domestic budgets, hence they might be hit more than say Russia, which needs USD 40 on oil to balance the budgets.

For India, lower oil prices are not net positive because a large number of Indians work in the Middle East and send remittances back home. Now we are staring at massive job losses among Indian workers in the Middle East resulting in lower foreign currency remittances although we might get some offset in the form of higher collection of custom duties by government.

2. In the recent past, European Central Bank (ECB) rolled out a bond buying programme of Euro 750 billion; and it has kept that somewhat open-ended. U.S. Fed also lowered the interest rates to near zero levels and has launched a fresh USD 700 billion Quantitative Easing (QE) programme. Do you think the developed world has fired the bazooka too soon? And how will that impact the bond markets?

Global markets were already highly leveraged and overvalued going into this crisis. Central bankers in G-7 had cut interest rates down to almost zero percent. It’s a fallacy that lowering rates will solve the economic problem. Have a look at Japan and you will get your answer. The cost of money is not the problem, it is the velocity of money which is not accelerating. Hence any QE without fiscal spending aimed at putting money directly in the hands of people will not help the global economy recover from this abyss.

I do not hesitate to use the word “Depression”. Yes, we are flirting with depression, the likes of 1929-32 and not 1999-2000 or 2008-2009—both of which led to swift recovery. I think, we are very close to massive printing of money to save the economy, save jobs, spend money may be to create much needed infrastructure but I am talking about trillions and trillions of dollar otherwise it’s “The Great Depression” once more.

3. How big is the risk of defaults at present? What do CDS hint at? To put it differently, growing corporate bond spreads, an opportunity or a risk?

The investment grade bonds are trading at huge discounts to their NAV and Coronavirus will create stress on more and more balance sheets. I think it is too early to talk about opportunities. Bounce, yeah, but opportunities absolutely are still evolving . We are looking at supply chains getting broken across the world and corpses will be seen in the next few months. There is no point in looking at CDS for direction because lack of liquidity has distorted prices across asset classes.

4. Why have gold prices been falling lately despite the prevailing uncertainty in global markets?

It is a margin call which has hit all asset classes together. An investor in gold also invests in other classes and on top of that many people keep assets as margins to add leverage to their portfolios. You will be surprised to know that the only liquidity in the last couple of weeks has been in large cap equities, US treasury bonds and GOLD and all three got hit because people wanted to raise cash. But if I look at how much gold has fallen then it is has touched an all time high in Indian Rupees.

The same thing happened around the Lehman crash, when gold slid to USD800 before going out and hitting USD1900 in the next few years. I think we are in the same position here. I won’t be surprised to see gold hitting USD 3,000 or INR 100,000 for 10 grams in the next 3-5 years.

5. Where does the Indian bond market stand in terms of factoring in risks?

The Indian bond markets, outside the benchmark 10-year bond, have always been illiquid and at these times redemptions just increase the dislocation in prices. On top of that the corporate bond market is heavily tilted towards financials which were already under the scanner since the NBFC crisis and now the situation is becoming more difficult after the current Coronavirus issue. I think the best price discovery  in Indian bonds is the benchmark 10-year G-Sec and everything else is a function of liquidity, which is not in a hurry to come back.

6. Speaking about India, risks involved in Additional Tier-1 (AT1) bonds have become quite evident of late. As per media reports, bondholders have a total exposure of Rs 94,000 crore to AT1 bonds. Do you see this becoming a perennial pain point in the wake of some recent experiences?

The risk in these bonds was never priced properly because investors only wanted to invest in high Yield To maturity (YTM) funds, without knowing the risks. This is quasi equity getting money 100 bp higher than the equivalent bond yield of the underlying bank. These are callable bonds and banks are sitting pretty over here. When the time comes, it’s highly probable that the bankers will not call these bonds. It is a third wake up call for Indian investors.

7. Asset quality problems of the Indian banking system have been largely pertaining to the corporate loan book. Do you see a beginning of a new NPA cycle (on the retail side) owing to a probable slowdown caused by the Corona pandemic?

We will see resurgence of a new NPA cycle, and this will not be led by corporate credit but retail credit. Our last 5-year GDP growth has come from household leverage, the money lent by NBFC and banks funded by private equity venture capital and mutual funds. We will see shockingly high default rates in personal loans and even mortgages over next couple of years.

8. What would be your message to Indian bondholders at this juncture?

In case of anything other than liquid funds and arbitrage funds, use all bounces (in bond prices) to get out. Because if spread widening will not hit the NAV then the coming stagflation will hit the bond yields. While doing this, be mindful to your overall asset allocation.

An important disclosure: Views expressed herein are personal and those of the interviewee only and under no circumstances shall be construed as those of or seconded by Ventura Securities.

Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.