investment strategy | volatility: if you are in Nifty or similar assets, stay passively invested; otherwise wait: Maneesh Dangi
You correctly predicted that yields will rise, crude will rise, and stocks will fall. You have the right model. Getting a good bearish pattern sometimes means it’s painful for investors, but markets are markets, they work on reality not expectations?
Yes, I fundamentally think that in the markets, time is more important than timing. It’s just another framework to actually look at things. In the configuration in which we live, there are cycles and people like us could potentially play cycles. There was a great upward cycle from March 2020 to July-August 2021 which we have discussed many times. It’s reversing precisely for the reasons we’ve been discussing for six, seven months.
2021 has been the reflation trade, the comeback trade, the small and mid cap stocks that you pointed out. The second half of 2021 was marked by a slight rise in inflation and bond yields. What cycle will be in play for the rest of 2022?
Why are interest rates rising? They are rising because central bankers and policymakers are not in favor of low rates that stimulate growth. So to some extent the growth has returned and that’s a reasonable story. That’s why many of your guests, including famous ones, say the tight rates actually reflect a strong economy. The little nuance of the macro that they don’t understand is that when interest rates go up, not for growth but for something else, which is inflation, it’s not really good.
Markets in November were actually pricing in one rate hike in the US and now we’re looking at six, seven. That’s why the markets are throwing up. I don’t think the surprise that I was anticipating and the fact that I thought the markets were wrong not to price rate hikes, I can no longer say that the markets are pricing in rate hikes. We must now ask ourselves what will be the secondary effects of the rate hikes that will tame inflation. This is happening as the global economy slows down, including in India. So the rate hike won’t be for the benevolent reasons that many are talking about – that growth is increasing and so we need to raise rates. No, growth is slowing and yet we sting because something seems to be troubling us, and that is inflation.
It is the same for oil. Oil prices rise for reasons such as demand and supply. If demand is very high then of course oil should go up but then after a long time and since 2014 it is actually supply that is driving up prices. The point I’ve been making for six or seven months and there’s a crescendo to come that it’s supply that drives the price of oil, not Russia, Ukraine or geopolitics; not demand. It’s the shortage of supply and unfortunately it continues. So the two will only reverse when they actually do the damage they are there to do, which is to slow down the economy very drastically.
You just reported high inflation and low demand. So what to do because bond prices will stay high and stock prices will stay low. What should the asset allocation be and what should an investor do? While in India you can say I earn 5% on FD but that’s not the goal. Are you telling your clients that you are going to put money into FDs or can you find a correlation in terms of asset class changes?
No, 5% is not an option. You get 7% in a 10-year bond. Good 10-year PSU bonds are available at 7%, they could very soon be at 7.5%. It’s not so bad anymore. We are not in the configuration we were in six or eight months ago, when rates were so low and there was no other option but equities.
Of course, we don’t have to resort to fixed deposits, but they will also increase as we move forward. When transitions happen, like what we’ve been seeing for four or five months, it’s better to be in cash. You don’t necessarily have to be in a long-term asset allocation where you’re locked in for three or four years. Sometimes it makes sense to sit on dry cash because neither fixed income nor stocks offer an opportunity, because cash is an option.
If you haven’t in the past four months, you can suddenly have interest rates 100 basis points wider and small and mid caps falling sharply. One should most likely still wait and earn 5-6% in some arbitrage funds and liquid funds; 4.5% to 5% in some savings deposits or a small finance bank that will give you 6 to 7%. Stick around for a while and you’ll get a good deal, whether in bonds or stocks. It’s more likely to be bonds because in equities the color is still a long way off because there are far too many people who actually believe India’s time has come and equities are what will make them rich. It doesn’t happen that way. Only after this color should the actions be entered.
Is it time now to get out of term deposits and buy government bonds? Why is it that in India government bonds are almost 7% and mortgages 6.5% or 6.6% because ideally the government gives more interest than what your banks charge you?
There is a conspiracy there. It’s like those offers made to you that come first, we’ll charge you later. These are floating rates. During your life, you are not going to know the rates you get. The bank offers you very low short-term rates, but eventually they are all linked to broader rate structures and they will be reset higher.
Comparing a 10-year repo-linked bond to a home loan is an unfair comparison. Typically you hold a home loan for 8-9 years and you are very likely to experience a net 8.5% to 9% instead of 6.5% as this is a very high end thing. short term.
On fixed deposits, my point is to wait with cash right now. At first there is a way to earn 5-6%. Just let your money do some basic plumbing and don’t lock your money in for the long term because most likely over the next five to six months you will have the opportunity to lock your money either in a 7.5 bond % to 8%, potentially 12%. CAGR in equity again when the final flush occurs. In either, you will have the option to dial a number. Until then, stay out.
Now, of course, a lot of people can’t do that, which is a point I’m making. I have been very clear for five or six months; stay out of small and mid caps because there’s a lot of cash and there’s a lot of foam in there. But if you are a long-term investor, then yes! Nifty or Nifty like assets are fair play. Stay passively invested. But if you’re an incremental asset allocator, it’s better to kind of wait.