“The majority of analysts are expecting 6-7 rate hikes by the Fed in this new cycle. In that scenario, US bond yields surely will be getting closer to this important psychological level of 3 percent,” says Shailendra Kumar, Chief Investment Officer of Narnolia Financial Advisors.
The US 10-year bond yield was above 3 percent in 2018 and the Fed rate at that point was above 2 percent.
Infrastructure and manufacturing have lagged broader market gains over the last ten years but will see a revival from here on, says Narnolia, who has more than two decades of experience in fund management and investment advisory.
Edited excerpts from an interview with Moneycontrol:
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Can the much-awaited LIC IPO be a blockbuster?
The LIC IPO, in terms of size, would surely be a large IPO. Even after the IPO there will be further follow-up offers to comply with listing norms in the years ahead. Such a large issuance will always see some adjustments in the market liquidity scenario, but looking at improving domestic participation and also the international appetite for large-quality issuances, the Indian market will be well able to absorb these. Market volatility in March will be more a function of how global markets perform.
Also read: LIC likely to float $8-billion public issue on March 11
Is it time to be more cautious due to the Ukraine-Russia tensions?
The Ukraine-Russia tensions remain an evolving story. The recent easing in the price of crude suggests that the market is gradually discounting the event. But a war cannot be fully discounted beforehand by the market. So, market participants should continue keeping an eye on the situation.
Have you spotted any investment themes that can be considered in the current market correction, and why?
The Indian economy slowed down over the 2010-2020 decade but is now on the cusp of a multi-year high-growth path. And this will give rise to the opportunity for larger gains in multiple themes. In a near-term sense, domestic cyclicals are set to outperform.
Infrastructure and manufacturing have lagged broader market gains over the last ten years but will see a revival from here on. Companies from these sectors have seen single-digit business growth over the past 5-7 years. Good companies from these sectors saw over 25 percent annual growth in business expansion during the 2002-2010 period. We expect a repeat of that era. The Digital space also looks exciting from a growth perspective though one needs to be stock specific and also time the entry as valuation remains high in this space.
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Do you think the global markets have already priced in the expected 2-3 rate hikes by the Federal Reserve?
2022 is a major reset year for the global monetary regime. For over a decade central bankers across major economies had been on an expansion spree, flushing the financial system with an abundance of liquidity. But a strong global economic recovery post-Covid, during CY2021, rising inflation, and strong employment and wage growth, had provided enough conviction to central bankers to reverse course.
This is a big reset, the reversal of a trend that was going on for over a decade and so it becomes the most important factor that will impact the performance of various asset classes across the globe. We have already started witnessing heightened volatility and this will increase as we move through this year. Though policymakers appear confident of a smooth glide path, one thing is certain: ‘the FED Put’ will not be easily available, unlike in previous years.
By any chance, can US bond yields cross the psychological 3 percent mark in the coming months?
In the recent past, the US 10-year bond yield was above 3 percent in 2018 and the Fed rate at that point was above 2 percent. The Fed rate in the coming rate rise cycle is expected to get to 1.75-2 percent. The majority of analysts expect 6-7 rate hikes in this new cycle. So, in that scenario, the US bond yield surely will get closer to this important psychological level of 3 percent.
Will the RBI consider raising the key policy repo rate towards the end of 2022?
In the recent credit policy, the RBI has clearly favoured growth. Post the budget it was a general expectation that the RBI would change its stance owing to the global policy environment, higher crude prices and the large government borrowing announced in the budget. But the RBI has taken a contrary position based on its assessment of domestic inflation. Though the consensus expects a change in stance and hike in the repo rate, that will be a real possibility only if inflation stays above the current forecast.
Are you bullish on the banking and infrastructure segments?
YoY growth of over 30 percent for two consecutive years in government capex augurs very well for infrastructure sector stocks. Also, this robust government capex will lead to a revival in private capex.
During the just concluded quarterly results, banks sounded positive about higher credit growth ahead and that should trigger a re-rating of banking stocks during the second half of the year.
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