Risk-on environment to help India markets as bonds, US dollar ease from peak

This bond yield reversal trend and dollar rates, analysts said, may benefit emerging markets (EMs) like India

Indian equity markets have been on a tumultuous ride in recent months, which have witnessed decadal highs for bond yields, oil prices, and the dollar. All three factors, however, have started to ease in the past month, helping restore investors’ risk-appetite. Will this reversal trend sustain? Analysts believe so.

“As inflation tumbles and the US Federal Reserve (US Fed) continues to hold off on increasing its benchmark rate further, I think it is fair to assume that we are done with the peak of US yields and dollar rates,” said Kedar Kadam, Director, Listed Investments, Waterfield Advisors.

Sujan Hajra, Chief Economist, Anand Rathi Shares & Stock Brokers, agreed. “With significant deceleration of consumer retail inflation seen in the US, we anticipate that the worst of the US bond market has passed. Additional rate increases in the US appear extremely improbable and the market is anticipating policy rate cuts in the first half of 2024,” he said.

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This bond yield reversal trend and dollar rates, analysts said, may benefit emerging markets (EMs) like India.

Milind Muchhala, Executive Director, Julius Baer India, for instance, said that a risk-on environment would benefit India in particular as he believes that the country has reached the peak of the rate hike cycle.

On November 17, the US 10-year treasury yields declined 70 basis points (bps) to hit a two-month low of 4.3 percent after it scaled to a 16-year high of 5 percent in October.

Back home, India’s 10-year bond yield, too, slipped by 14 bps to 7.22 percent.

Meanwhile, the US dollar index, which gauges the greenback’s strength against a basket of six currencies, declined over 3 percent to 103 levels in a month following softer economic data across PMIs, non-farm payrolls, and inflation.

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Will India outshine its EM peers amid lower yields, dollar?

Despite its premium valuations, analysts expect lower bond yields and the dollar to trickle benefits to India compared to its EM peers, supported by strong corporate earnings growth.

“Indian markets seem to be on a good wicket at the current juncture, albeit with some near term intermittent volatility, which again could be driven more by global factors. Valuations of domestic markets, too, have turned reasonable as the Nifty trades around 18 times the one-year forward earnings estimate, inching closer to historical averages,” said Muchhala of Julius Baer India.

Whether or not this would trigger foreign institutional investors (FIIs) to return to India in the medium-to-long term has to be seen.

“While India remains an expensive market versus the EM peers, we believe that stronger earnings growth, macro stability and better visibility will help the country to enjoy premium valuations,” Muchhala added.

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Both benchmark indices—the S&P BSE Sensex and Nifty50—have gained 3 percent each in the past month. Earlier, the Sensex and Nifty50 had ended October on a negative note, down 2 percent.

Underlining some of the key risks to the overall recovery of domestic markets, Kadam of Waterfield Advisors listed factors such as renewed geopolitical tensions, crude price inflation, the slowdown of exports, delayed rural recovery and foreign outflows as a challenge.

Where should you bet?

Against this backdrop, Arun Chulani, Co-Founder, First Water Capital Fund, is bullish on industries with hard assets and underlying growth, such as chemicals, metals and infrastructure.

On the other hand, Mucchala preferred banking and financials (especially large private banks), and pockets of consumption such as auto and home improvement.

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.