Not in recession but bonds worth $15 trillion sitting on negative yields worldwide

The time lag between yield curve inversion and recession blowing out may extend to a couple of years. Not to forget, over $15 trillion worth of bonds worldwide are sitting on negative yields, Dharmesh Kant, Head – Retail Research, IndiaNivesh, said in an interview with Moneycontrol’s Kshitij Anand.

Q) How will measure introduced by the govt impact markets?

A) ‘A stitch in time saves nine’ holds good always. The measures announced by FM did improve sentiments. Announcement of mega PSU Bank merger, a rollback of super-rich surcharge on FPI’s and domestic investors did the trick and a rousing response followed.

Headline indices rallied over a couple of percentage points the following day. It was a slew of financial booster for Automobiles, MSME’s, Corporates, Infrastructure, Banks, NBFC’s and HFC’s were add-ons.

We expect the trading bias to be positive for the next couple of weeks as a built-up for further announcements. Corrections if any, will be bought into.

Q) Is growth the biggest worry for D-Street? Corporate earnings are unlikely to rebound in the September quarter. Globally, things are looking muted. Do you think this bearish trend in equity markets is likely to continue for some more time?

A) My own sense is that for the next couple of months the market will trade with positive bias. Corrections will be bought into, and in the long-run growth will always remain a decider factor.

In between, we do have phases where measures to spur growth takes credence, especially in the slow down phase. The market always discounts forward projections on an optimistic note, giving importance to the growth measures.

We are at the beginning of this in-between phase. Q2FY20 earnings update will be critical and any positive surprise with respect to market expectation will cement the ensuing pullback rally.

Q) What is your call on the currency in the near-term? What is causing turmoil in currency markets?

A) From the near-term perspective, the currency is going through depreciation. High of 72.27 of USD-INR pair is likely to hold for now.

The recent depreciation of major currencies with respect to the US Dollar was primarily on account renewed trade war between US and China. 

Off late, tweets by the US President suggesting truce has a cool-off effect on currencies. We are expecting appreciation in INR in the near-term towards Rs 70.50/USD levels.

Q) The whole world is talking about a recession. But, the CEA dismissed the claim and said that it at best can be categorized as a slowdown and not a recession, and a stimulus is unwarranted which dented sentiment on the Street. What are your views?

A) I do concur. This is definitely a slowdown and a recession as of now. My own sense is that we are still a couple of quarters away from a recession, only if the concerted economic measures taken by various central banks and governments across the globe fail to deliver on desired lines.

Indirect stimulus like lower borrowing cost, lower corporate taxes, higher government spending has been infused into the system.

Anything above it is not required now. 

If these measures are unable to pull off then there will be serious trouble. We are in a cyclical downturn. Stimulus through monetary and taxation policies should be enough. Some of which has been rolled out and few more are expected.

Q) Any sector(s) which could turn out to be the dark horse in the next 2-3 years and why?

A) Pharmaceuticals and Public Sector Banks are dark horses. For PSB’s the worst seems to be behind them. Once the recapitalisation is done, they will be in a position to tap large opportunity vacated by the out of business NBFC’s. 

Valuations and the low base effect is an added advantage.

The silver lining of Q1FY20 numbers was lower slippages reported by PSB’s and decent growth numbers of Pharmaceutical companies.

Most of the Pharmaceutical companies are back on track, they have a strategically re-balanced domestic and foreign portfolio. We believe FY21 will be a sunrise year for pharmaceutical companies. Here, again low valuations and rejigged businesses are a big plus.

Q) This is probably the best time to put your money to work if you are a long term investor. Do you recall any success story of any significant fall in the past which still remains fresh in your family?

A) I would still prefer a balanced approach between Equities and Fixed deposits. The world is precariously placed. However, having regard to lead indicators like the inverted yield of US bonds nothing can be concluded presently.

Usually, the time lag between yield curve inversion and recession blowing out may extend to a couple of years. Not to forget over $15 trillion worth of bonds worldwide are sitting on negative yields.

The last big fall was in 2008-09 for Indian markets. That has yet not happened. The companies which have been wiped out during the last year and a half were actually bad companies. 
It was all about siphoning off money and worse corporate governance in those select companies.

To see that as a yardstick for the underperformance of the broader market will be unfair. 

At times wrong deeds of others do put righteous people in trouble, which has largely been the scene in broader markets, though the slowdown, aggravated it further.

I do believe, we are a couple of quarters away from all-out equity allocation.

Q) What should be the strategy of investors? Do you think it is time to increase the share of fixed income or gold in the portfolio as fears of recession looms which could hurt returns from equity markets?

A) I would suggest 30-30-30 percent allocation between debt, equity, and gold while keeping balance 10 percent liquid.

Q) Many experts advise investors not to catch the falling knife. But, if someone is avoiding catching a falling knife they will miss out on the opportunity to create wealth. What should be the criteria which investors should pick before they buy in such stocks?

A) It is always wise to leave 10-15 percent gains on the table if one is chasing over 100 percent returns than to be caught on the wrong side and lose 50 percent to 70 percent of capital. Smart research is the only criteria.

Q) Nifty is down over 5 percent from the Budget Day, and the small and midcap indices are virtually in a bear market. Do you think the quote from Phillip Fisher fits the best — “The stock market is filled with individuals who know the price of everything, but the value of nothing.”

A) Value and price both are relative terms. Circumstances and the prevailing environment decide them. Nothing is sacrosanct; it is always a moving goal post.

What is valuable today may be obsolete day after and what is cheap now may look expensive next hour.

The market knows everything and acts accordingly. Why worry about individuals!

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