Long-term government bonds seem to have surpassed the expected yields on the back of a rate hike by the Reserve Bank of India but Rajiv Shastri, Director and Chief Executive Officer at NJ Asset Management, doesn't see much change from this position.
"While rates may go up some more, we don't expect much change in long term G-Sec yields from this point," shares the finance professional seasoned in the mutual fund space for over 25 years at an interaction with Moneycontrol. Shastri was part of the team that set up HDFC Mutual Fund.
He believes that higher interest rates will lower demand at a time when input costs are high. "Lower demand will mean that higher input costs cannot be passed on to consumers which will squeeze corporate earnings," says Shastri. Excerpts from the interaction:
The market has corrected itself more than 12 percent in little over a month. Do you see more corrections, considering the macro issues?
Market uncertainty has increased considerably over the last month or so amid a continuing war in Ukraine. This war has caused further supply disruptions, intensifying inflationary pressures which now threaten to become systemic.
Apart from disrupting economic activity because of supply shocks, this also makes the interest rate environment very uncertain.
So, while we do not try to forecast market movements, our protocols indicate that some caution is advisable in this current environment. Our current equity allocation of about 50 percent reflects that caution.
Do you expect slowdown in domestic inflow if there is further correction and volatility?
There have been times when domestic flows have slowed in the past as well, but this is typically a short-lived phenomenon. We must remember that not many investors participate in the equity markets even today and the number is steadily increasing.
This increased participation is reflected in the inflows that the market experiences. SIP inflows alone are quite substantial and have been growing steadily.
Even with slightly higher interest rates, there are still no viable long-term investment options that are capable of beating inflation in a sustainable manner. So, while there is a possibility that domestic flows may experience some short-term disruption, we don't expect it to persist.
Global growth concerns are at the fore now with the UK economy contracting in March. Do you see recession in Europe?
Europe is in a uniquely disadvantaged position due to its interlinkages with both Ukraine and Russia. The supply disruptions caused by the war in Ukraine have hurt the European economy the most. These are also causing the highest levels of inflation there, compared to the rest of the world. These stagflationary conditions have no easy policy responses and we believe that both the Bank of England and the European Central Bank will struggle with it for some time.
The Eurozone also has the added disadvantage of not having a common fiscal policy for the entire region which can be used to stimulate demand. This deprives them of an economic policy response that is available to the rest of the world. So there is a period of pain that can be expected for the Eurozone which will have some spillover effects on the British Economy as well.
Do you expect faster policy tightening by the Fed as well as the RBI in the upcoming policy meetings as inflation fear seems to be far from over?
The Fed has indicated a clear path and we doubt that it will deviate much from it. It will increase rates and the debt markets there are just about beginning to price these rate hikes.
In India, on the other hand, market yields were already elevated before the rate hikes. And while they have moved up even more in response to the rate hikes, the current long term G-Sec appears to be much higher than warranted from a long-term perspective.
So, while rates may go up some more, we don't expect much change in long-term G-Sec yields from this point. Shorter term G-Sec yields and Corporate bond yields are not that well placed and these may rise with higher interest rates.
Ironically, the longer end of the yield curve appears to be better placed and a safer bet than the short end of the curve.
Do you think the pain of inflation and rate hikes by central banks is yet to be digested by the equity market?
It's not just about higher rates but their impact on the economic environment that matters. We believe that higher interest rates will lower demand at a time when input costs are high. Lower demand will mean that higher input costs cannot be passed on to consumers which will squeeze corporate earnings. This can cause some short term distress since earnings growth expectations continue to be elevated.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.