Moneycontrol Pro Panorama | Investors take a flight to safety

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Dear Reader,

Fed Chairman Jay Powell made it clear that a 50 basis point hike in interest rates was on the table in May, marking a shift in tone in his commentary. While it has been widely expected that rate hikes of 50 basis points will be needed to move the interest rate needle higher, so as to calm inflationary fires, the Fed chief uttering those words makes it near certain.

Global equity investors are already bracing for what lies ahead, with a Bank of America survey of fund managers pointing to ‘long oil/commodities’ as being the most crowded trade. “Global investors are net overweight 38 percent —the highest ever overweight—on commodities, up 5 percentage points month-on-month. The current allocation to commodities is 2.4 standard deviations above the long-term average,” we write in today’s edition. Real estate is the other asset class that has come into the limelight.

Low interest rates had crowned equities as a prime asset class to be in, but the prospects of a sharp hike in interest rates has made these other ‘hard’ asset classes more attractive. Do read to get a flavour of how fund managers are reacting to the shifts under way. A side effect is how this is affecting commodity markets, disrupting trading and turning the spotlight on the functioning of these markets and whether there is a need for more regulatory oversight.

Two large mining companies Rio Tinto and BHP Billiton recently reported their results, with output in some of their key commodities affected because of COVID-19 related disruptions, supply chain problems, labour shortage and social unrest, according to an FT report. Rio Tinto reported that its iron output fell by 8 percent in the March quarter. BHP’s copper and nickel output fell, but its iron ore output was steady. Tight supply conditions could keep commodity prices elevated, adding to inflationary pressures for consumers.

The question that will be uppermost on investors’ minds is how to prepare for what lies ahead, as domestic inflation too has risen sharply. There are some sectors that are better positioned when interest rates increase and there are others that typically underperform. Then there is also the relative situation, of how Indian interest rates will compare to global rates and how foreign investors react to that changing gap. Here’s what investors should do, to protect themselves from a rising interest rate situation.

Technical Picks: Nifty, Maruti, Gaur seed, Grasim, ICICI Bank (These are published every trading day before markets open and can be read on the app)

Ravi Ananthanarayanan