By: Tavaga Research
Amid negative global cues, the benchmark equity indices Nifty and Sensex fell by 1% on Wednesday to settle at 16,858 and 56,598 respectively. Investors and traders expressed caution ahead of RBI’s policy meet where the monetary policy committee is expected to further hike the policy rates as a direct result of hikes by central banks globally. Further, the inflation figures are expected to rise due to the surge in consumer spending around the festive season. The inflation figures are further set to rise due to the petrol and diesel prices in India. While the Brent crude oil price has fallen from $105 in August 2022 to $86 in September 2022, there has been no change in the prices of petroleum products in India.
In the last 3 MPC meetings, the committee has raised the repo rates from 4% to 5.40%, a hike of 140 bps to maintain a balance between growth and inflation. The current monetary policy outcome will be announced by RBI Governor Shaktikanta Das on 30th September 2022. As a result of the tightening monetary conditions, in the last 6 months, India’s 10-Year G-Sec yield has risen from 6.8% in March 2022 to 7.4% in September 2022. The direct implication of this rise is that borrowing becomes expensive.
The India Decoupling Story and the Global Turmoil
US Treasury instruments (fixed-income instruments) are set to face the biggest decline since 1973 due to the rise in yields. The yield on the 10-year note jumped to 4%, the figure last seen in 2010. Why does this affect the US economy?
- Borrowing gets expensive and could lead to a collapse in the housing market
- Fixed-income investors and funds carrying sovereign instruments in their portfolio face a major drawdown
As a result of the fiscal policy announcements by the newly elected UK Prime Minister Liz Truss, the UK 30-Year gilt yields touched a 20-year high of 5% and the 10-year gilt yields rose to 4.59%. Further, the Pound crashed to $1.04 from $1.40 a year ago.
In response to the weakening trends in the bond market, the Bank of England announced a few steps that would delay the quantitative tightening leading to a fall in yields. While the yields fell as a result of the direct action by the BoE, the pound further depreciated against the USD. For the Pound to strengthen, the Bank of England needs to tighten. However, the Bank of England chose quantitative easing to reduce the downward pressure on the prices of UK treasury notes (instead of saving the pound from depreciating).
Despite negative global cues, high petroleum prices, and tightening monetary conditions, India has fared very well on all the micro and macroeconomic parameters. The credit growth for the week ended September 16th, 2022 rose by 16.2% (such growth was last seen in 2013). Indian stock market indices have been the least affected by the global turmoil caused due to the Ukraine-Russia war and the rise in yields in the UK and the US. The Indian Rupee is the least depreciated compared to other currencies. While it can be hard to believe, India has shown clear signs of decoupling. Decoupling here simply means disassociating from what’s happening around the globe (acting differently).
That said, sustainable decoupling is impossible. India might soon face the brunt of what’s happening around the world. Somewhere, a long, sustained decoupling can also prove to be harmful. One negative macroeconomic news can lead to a sharp fall in indices, and G-Sec yields can rise faster making it further difficult for the citizens in the low and middle-income brackets. This can further lead to demand destruction.
Amidst all this, where can India’s hard-working retail investors invest? The Indian benchmark indices are at premium valuations (compared to other countries), the fixed deposit rates are still low compared to where they were pre-covid. This leaves investors with few options to park their money.
Team Tavaga will be discussing a few strategies which retail investors can consider while parking their money
Fixed Deposits
While India’s credit growth has been strong as per the recent numbers published by the RBI, the growth in deposits is still low compared to what it was 10 years back. With a high credit growth and a median deposit growth, banks are bound to increase the interest rates on fixed deposit schemes as they further need funds to lend and cater to the high capital expenditure requirements of the corporates.
While the deposit rates have risen compared to the levels seen in 2020 and 2021 (during covid-19), they are yet to match the pre-Covid levels. Therefore, one can expect a rise in fixed deposit interest rates during the October to December quarter. Investors can wait for the banks to increase the interest rates and then buy long-dated fixed deposit schemes.
Equity
As mentioned above, Indian equity indices are one of the best performers not only among emerging economies but also against developed economies. Intraday traders and swing traders must maintain a cautious approach and sit on 100% cash rather than catching the bottom. The supports are breaking!
While Indian investors cannot sit on 100% cash as a result of the previous investments made with a long-term horizon approach, they can consider deploying the money once there is panic in the market. A fall in Nifty from 18,604 to 16,858 is only a 10% correction which is considered normal. To catch the bottom, there should be panic. Large amounts of cash should only be deployed during such times. Behavioral biases can come into play during such times, but an investor with a good advisor will always invest in the right instruments at the right price. Therefore, Advisor Zaroori Hain!
Buying every dip is not the right approach as it seems difficult to find the bottom, especially when India hasn’t even corrected by more than 20-30%. SIPs must continue and a lumpsum investment should be made in three to four tranches during panics. This ensures that an investor won’t lose out even if the market does not fall by a big amount.
Gold
All the commodities have fallen from their peaks (last seen during the start of the Russia-Ukraine War). Gold ETFs in India have fallen by 8-10% (from 52-Week highs) while Silver ETFs are available at a discount of 20% from their highs. Gold saves individuals during turmoils and crises and therefore allocating some part of your wealth to gold is important. However, the risk appetite comes into play while determining the quantum of purchase and the time horizon for which one should hold gold.
The best time to buy gold is during normal economic conditions. During periods of recession and inflation, gold is poised to do better. But buying gold at peak during such times can be of less use. Therefore, making an allocation to gold during normal economic conditions is desirable as they are available at a good price.
Debt Mutual Funds
Considering the goals of an investor, target maturity funds (mainly passive) are one of the best instruments to buy. The movements in the yields and the bond prices will not affect an investor who holds the target maturity fund till its maturity. For those investors who prefer simple fixed-income instruments, should resort either to fixed deposits or buy target maturity funds in lumpsum and match the goals with the duration of the fund.
The best advice for long-term investors will be to focus on the equity and equity-oriented products and other fixed-income istruements they hold in their portfolio. Geopolitical concerns are temporary and present a good opportunity for investors to buy on dips. India is a demand-driven economy and considering the current macroeconomic parameters, the demand is expected to grow at a good pace. The long-term story is intact!
Simple things to remember
- Mutual fund SIPs must continue with lumpsum investments at the right times
- Prefer index funds and ETFs, especially in the large-cap equity category and for target maturity debt funds
- Avoid trading during times of high volatility, preferable to sit on 100% cash
- Always use the services of a SEBI Registered Investment Advisor
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