Topic 2: OUTLOOK FOR 2022
FIXED INCOME OUTLOOK: BRACE FOR IMPACT
Given the inflationary environment and central banks across the globe winding up ultra-loose monetary policies, the 10-year government security yields in India have increased by around 35-40 bps since the beginning of this year. The higher borrowing requirements of the center (as projected in the Union Budget) to fund the fiscal deficit, borrowing from the state governments, and revival in private credit shall put pressure on liquidity and bond yields. Such an increased supply of bonds in the market shall negatively impact the fixed income market.
As we expect interest rates to be volatile, it is best to avoid funds investing in long-dated securities. Thereby, investors can consider investing in securities with shorter maturity (short duration funds and banking & PSU funds). Also, one can consider investing in floater rate funds as returns are adjusted based on prevailing yields in the market. To benefit from the steepness of the yield curve, one can invest in funds with 2.5 to 4 years of duration and run a rolldown strategy.
EQUITY OUTLOOK: THUMBS UP
The government’s growth and capital expenditure focus in the budget is positive for equity markets and has essentially put India back on its growth trajectory. This investment-led growth could provide a boost to jobs and incomes. We expect equity markets to perform well with long-term drivers in play and earnings for corporate India likely to rebound. In the near term, there are several headwinds such as US Fed tapering, geopolitical tension, and rising crude prices which could lead to increased volatility in the market. We believe that such market volatility should not concern investors with long-term investment horizons. Over time, this market volatility would be a minor blip (drawdown) in their overall returns. Also, investors with excess liquidity should use this market volatility as an opportunity to deploy funds.
Given the inflationary environment and central banks across the globe winding up ultra-loose monetary policies, the 10-year government security yields in India have increased by around 35-40 bps since the beginning of this year. The higher borrowing requirements of the center (as projected in the Union Budget) to fund the fiscal deficit, borrowing from the state governments, and revival in private credit shall put pressure on liquidity and bond yields. Such an increased supply of bonds in the market shall negatively impact the fixed income market.
As we expect interest rates to be volatile, it is best to avoid funds investing in long-dated securities. Thereby, investors can consider investing in securities with shorter maturity (short duration funds and banking & PSU funds). Also, one can consider investing in floater rate funds as returns are adjusted based on prevailing yields in the market. To benefit from the steepness of the yield curve, one can invest in funds with 2.5 to 4 years of duration and run a rolldown strategy.
EQUITY OUTLOOK: THUMBS UP
The government’s growth and capital expenditure focus in the budget is positive for equity markets and has essentially put India back on its growth trajectory. This investment-led growth could provide a boost to jobs and incomes. We expect equity markets to perform well with long-term drivers in play and earnings for corporate India likely to rebound. In the near term, there are several headwinds such as US Fed tapering, geopolitical tension, and rising crude prices which could lead to increased volatility in the market. We believe that such market volatility should not concern investors with long-term investment horizons. Over time, this market volatility would be a minor blip (drawdown) in their overall returns. Also, investors with excess liquidity should use this market volatility as an opportunity to deploy funds.
