US Fed Chair Jerome Powell reiterated on Wednesday, June 12, that the central bank would need more confidence that inflation has come down sustainably. This put a damper on hopes that the start of the rate-cut cycle was near in the world’s largest economy.
Inflation has kept the markets nervous since 2021 after the COVID-19 pandemic forced central banks to unleash a barrage of liquidity. Major global central banks started aggressive monetary tightening, but the easing of inflation has been slower than expected.
The US jobs market remains tight, and the economy has been resilient despite concerns of a recession, indicating rates could stay up longer.
“Unemployment rates in many developed countries have not increased as expected, raising concerns about a persistent wage-price spiral. Coupled with rising global protectionist tendencies and heightened geopolitical uncertainties, these factors suggest that global inflation is likely to remain elevated in the medium term, compared to the period between the 2008 global financial crisis and the 2020 COVID-19 pandemic. Consequently, it is reasonable to expect that monetary policy and overall interest rates will stay higher for an extended period,” Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers, pointed out.
As inflation remains sticky and the Fed remains resolute in its fight against inflation, there are expectations that the US central bank may make only one rate cut this year, and even if it does, it would be a shallow cut.
Also Read: Modi 3.0: As Nirmala Sitharaman back on FM’s chair, share market pundits bet on…
Experts say it is almost evident that the ultra-low rate regime of the pre-pandemic era may not return. What should be the investment strategy during an elevated rate regime?
Mint consulted experts for their insights on investment strategies during an elevated rate regime. Here’s what they shared:
Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers
Hajra said in a high-interest-rate environment, a greater allocation to fixed income over equity assets is advisable. Within equities, value investing appears more attractive than growth investing. Defensive and less interest-sensitive sectors should be preferred over more interest-sensitive ones.
However, Hajra observed that these asset and sector preferences may not yield superior returns compared to benchmarks.
If investors have anticipated higher future inflation and interest rates, value and defensive sectors might not outperform growth and aggressive sectors.
Moreover, the expectation of prolonged higher inflation and interest rates is not guaranteed. Factors such as slower economic growth, rising unemployment, positive supply-side shocks, and technological progress could reduce inflation and interest rates faster than currently expected, he said.
Also Read: Nifty 50 hits a fresh record high: Can it touch 24,000 before the Union Budget 2024?
“We advise investors to adopt a long-term strategic approach to investment management. Numerous studies indicate that over the long term, more than 90 per cent of portfolio return variability is determined by asset allocation decisions. Asset allocation should be based on realistic long-term return expectations and individual risk tolerance. Once strategic allocations are set, investors should not be swayed by prevailing perceptions or short-term news, including near-term inflation and interest rate trends,” said Hajra.
Making tactical portfolio changes based on such perceptions or attempting to time the market often does more harm than good to long-term portfolio returns.
Deepak Jasani, Head of Retail Research, HDFC Securities
Jasani underscored that while equities traditionally do well in low-interest regimes, the experience over the past few years has been different. Equities have continued to do well in a high-interest rate era. Traditional valuation methods have been rethought in times when corporate profitability is showing no signs of aligning with or being impacted by the rate cycle.
“Investors could closely watch company earnings growth and give lesser importance to the rate cycle. Only when there is a risk of a series of rate hikes should investors get worried,” said Jasani.
Joseph Thomas, Head of Research, Emkay Wealth
Thomas believes this is not the right time to cut rates unless there are clear signs that inflation has eased sustainably to central bank target levels.
“For the domestic economy, both headline and core inflation have come down. The gains in core inflation are more significant. Similarly, in the US too, the level of inflation is lower than expected. Is this sufficient for a rate cut? Probably not. Central banks will look at the sustainability of these numbers before taking rate action,” said Thomas.
The RBI forecast for inflation in Q1 of FY25 is 4.50 per cent. According to Thomas, the positive inflation numbers may lead to rate cuts from the RBI and the Fed as early as September 2024.
“Three factors strongly indicate lower rates, apart from the bond index inclusion and the lower govt borrowings. First, the overnight rate has been trading close to 6.10 per cent. This is much lower than the repo rate at 6.50 per cent. Therefore, the repo rate is not sustainable. Second, the interbank has a good surplus liquidity. Third, the Rupee is weak. Weaker local currency means effectively lower interest rates,” said Thomas.
Thomas said the most appropriate investment avenue is long-duration fixed-income products.
Aamar Deo Singh, Sr. Vice President, Research, Angel One
The US Fed’s decision to keep interest rates unchanged and signal that there might only be one rate decrease this year seems to be driven more by worries about inflation and the strength of the US economy.
“In the present higher rate scenario, investors should search for entry chances only in quality stocks, and that too, on decent corrections and more in a SIP stock portfolio strategy. They should also be ready for increased market volatility,” said Singh.
Suman Bannerjee, CIO, Hedonova.
Bannerjee believes that investors should strategically diversify their portfolios across asset classes such as high-quality bonds, dividend-paying stocks, and inflation-protected securities (TIPS) during elevated interest rates. These investments offer reliable returns and help mitigate the impact of increased borrowing costs and inflation. Real estate investment trusts (REITs) also present attractive opportunities for income generation and inflation hedging.
“Given the sensitivity to interest rate fluctuations, it’s prudent to reduce exposure to high-growth, high-debt companies and maintain a sufficient cash reserve for seizing emerging opportunities amid market volatility. A well-balanced portfolio that includes a mix of equities, fixed-income instruments, and alternative investments is essential for navigating a higher-rate environment while aiming for sustained growth and stability, effectively managing risk along the way,” said Bannerjee.
Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities
Sheth pointed out that high interest rates would mean corporations and consumers would have difficulty financing their needs. High rates also deter investors from taking unnecessary risks in equity markets since they are getting a higher risk-free return.
“Since we are just a few months away from the US Elections, we might see the markets remain buoyant, as politicians will do everything in their control so the feel-good factor prevails, at least till they are re-elected. The problems may begin after the US election ends,” said Sheth.
“One must maintain a balanced portfolio with gold, debt, and equities. Investors can reduce their exposure to foreign equities and riskier stocks as we move closer to the US election in November,” Sheth said.
Read all market-related news here
Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
3.6 Crore Indians visited in a single day choosing us as India’s undisputed platform for General Election Results. Explore the latest updates here!
