As going gets tough, get tougher with aggressive allocation to debt, suggests ICICI Securities

The market is in throes of a rough patch, with the headline indices flat for almost 18 months now, barring a few spurts that have been sold each time. This has led to disappointing returns for equity investors at the portfolio level.

Analysts advise investors to be creative and divert allocations to fixed income products as they promise higher yield on investments, especially after a number of interest rate hikes.

“The debt markets present a unique opportunity with global inflation remaining sticky and the US Fed expected to keep rates higher for longer,” said analysts at ICICI Securities.

“The RBI will have little choice, in case of further rate hikes in the US. However, we believe the Indian repo rate can peak around 6.75 percent, instead of 6.5 percent, considering sticky inflation across the globe. This provides a significant opportunity to lock in higher yields at current levels.”

The US Federal Reserve is all set to raise rates by 50 basis points, most analysts and economists believe. The central bank has suggested that it does not see any chance of cutting rates in the near term.

Debt strategy 

ICICI Securities said the investment in target maturity 2028 index funds, which invest in gilts and state development loans (SDLs), is suitable for investors who have a five-year time horizon.

The broker said investors with higher risk appetite who want to play peaking interest rate cycle with four-to-five-year horizon can invest in dynamic bond/gilt funds with 60 percent allocation at current G-Sec levels and balance in April or when 10-year G-Sec yield touches 7.50-7.55 percent.

“We believe the entire liquidity earmarked for fixed-income allocation can be deployed at this stage to lock in the current yields of 7.50-7.75 percent,” it said.

The sentiment has been echoed by several fund managers in recent months as well, including S Naren of ICICI Prudential Mutual Fund.

Equity strategy 

Since the market shows no signs of rallying higher, allocation to equity has taken a backseat. The domestic flows have dwindled, which is also hurting markets. Moreover, expensive valuation is also a concern, said UBS earlier this week.

ICICI Securities said equity allocation should be deployed in staggered manner over the next six months, while investors can utilise any correction of 5-7 percent to around 17,000 Nifty levels for lumpsum investment in equities.

Those who are invested in equities through the SIP route in mutual funds can increase their allocations in the current round of correction and continue to allocate funds to multi or flexi cap and dynamic asset allocation funds, the broker said.

“Any correction in the Nifty to around 17,000 levels can be used to deploy lump sum across market caps and themes like banking and infrastructure sector,” it said.

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