I just want to talk about the elevated crude oil prices and very categorical comments as well coming in from Russia that oil prices could even hit $300 a barrel if the US as well as Europe actually went ahead and banned imports. Does that look quite feasible because a lot of countries have mentioned that they will not be going ahead and doing so?
On the crude oil front, any number which is quoted right now, given that there is so much uncertainty on the geopolitical front cannot be discounted at these values. So, one needs to add and obviously Russia is one of the biggest crude suppliers. So, while I do not know whether we will anytime soon reach that number, the fact that there is no solution as yet in sight is something which the markets definitely are worried about right now.
When it comes to the sharp rise that we have seen and bond yields, global investors seem to be factoring in some form of a prolonged inflation, given that we have seen commodities across the board seeing a sharp rise. What do you think global investors are now pricing in?
We have barely started the third month of calendar year 2022 and the foreign portfolio outflows from big equities at about Rs 2,500 odd crore is from fixed incomes. When there is a lot of uncertainty, typically foreigner mentality is to keep money handy and then take care of it later. That is the current mood. Of course the next implication is that at every level, markets when you talk about fixed income markets for example, the carry is looking attractive. The rupee has been depreciating but it has been very stable for a long period of time.
So yes, the fence sitters may still want to wait and watch till they take a decisive call. There are a very few in the minority at the current juncture who want to avail of the carry. It is better to have a certain environment rather than come into an uncertain environment.
To add to that, this is also turning out to be a bit of a huge challenge for global central banks including India. There is rising inflation, surplus liquidity and geopolitical tensions. Do you think at a time like this, interest rates would be headed higher or will the Fed kick the can down the road?
Clearly the central bankers world over and that includes India, are caught between the devil and deep sea. So, on one hand, potentially Ukraine wheat supplies can be disrupted and that can have a potential impact on the entire season for the year 2022 and could sour food inflation.
On the other hand, the current inflation is still docile. Obviously, the rising crude oil prices have the potential to drop almost 1% from GDP because the 2021 crude oil average was around $70 and will already at say beyond $100 it also has implications on current account deficit. All that put together it is going to be extremely tight rope while the Fed is singing a different song, the Euro zone is talking a very very different tune and India is trying to observe all of these. We are in a much better situation at the current juncture but we cannot be completely isolated. So it is a tricky one but one thing is certain. Decisively, rates cannot go down if inflation is going to remain sticky which is the case as we speak right now.
That is the other thing that I want to talk about. Since you did talk about India as well, what could be the longer term repercussions if the Indian central bank continues to withhold rates in a rising inflationary scenario because sooner or later they will have to move on rates?
The joker in the pack is going to be the crude oil prices. Of course, gold is another import item for India and gold prices also have been on a major sizzle. These two commodity prices have a lot of war premium, a lot of fear and uncertainty premium embedded. Which is why the gold price is close to about $2,000 plus an ounce as we speak.
Going into monetary policy, what is going to be critical is what is going to be our assumption? The hope right now is that this war recedes and obviously bulk of this froth that has got built up into these commodities will start easing. Are they going to reach the levels of just before the war broke out? Very unlikely, but we also need to be mindful that global demand and global growth is getting to be tepid. That means the Fed may not be as hawkish as they were probably a fortnight back. a lot of the sum of total parts will go into decision making. India’s headline inflation is still within tolerable limits. It is the core inflation which is sticky and that was the case even a fortnight or a month back.
I think it is going to be an evolving situation and that nervousness obviously will not let the markets breathe easy for now. Because the yields have gone up, that has led to a mark to market loss on the portfolios but what is important to note in fixed income is as the yields go higher. it is the carry advantage that starts playing at investment level and though the markets are pricing in or the yield curve has priced in almost 100 bps of rate hike incrementally, even if there were to be sharp moves the impact on the markets may not be very high.
So concerns are there no doubt but carry as a strategy likely for fixed income investors for the dominant path of 2022.
We are seeing a huge commodity inflation. Nickel touched $100,000, there has been a huge spike in copper, wheat and other agri commodities. What is your message for all of those who are looking at fixed income products and equity markets and wondering if this is time to take cash off the table and maybe look at the commodities play?
Rear view driving seldom works in the investment world. 2021 being a sizzling year for equities, those who are looking at past returns to try to invest now are in for a rude shock. My message is one should stick to your asset allocation incrementally as yields go up and as the equity markets correct and valuations get more comfortable.
In fixed income, higher yields are playing to one’s advantage. Sovereign yields are so high and it is allowing investors to live by their asset allocation without getting too drawn on by the market’s daily volatility. Stick to a disciplined investment route without timing the market. It is very difficult. If one cannot really predict the outcomes, why should one want to control the way your portfolio? Timing is something that we would not really recommend. Even in this market, disciplined staggered investments should really be the way out.