ON THE EVE OF THE CREDIT POLICY REVIEW-AN AGGRESSIVE CALL FOR INVESTMENT IN LONG END OF THE CURVE
Kindly refer to my blog note dated July 12’2010 “GREAT OPPORTUNITY AT LONG END OF THE CURVE”. I had given various reasons for my belief of investing at the long end and had suggested a staggered investment from then to run upto the Credit Policy Review on July 27’2010.
As suggested in that note, 10 year benchmark in anticipation of further rate hike expectations have inched up from 7.65% to currently closer to 7.70% levels.
What is the way going forward from hereon:
Negatives in the market:
- Inflation to further rise to closer to 12.25 to 12.50% & peaking off at these levels
- Maybe erratic monsoon as seen in some of parts of the country & its repercussions
- Further rate hikes in the future (taking the overall rate hikes for the year to between 125 to 150 bps as compared to last year)
- Since 2003 when the interest rates were at their lowest & thereafter either remaining steady or only going upwards, Short Term Schemes as an asset class has outperformed long term GILT & Bond Funds on 1/2/3/5/7 year time horizons; dissuading clients to take unnecessary duration or interest rate calls
Positives in the market:
- More than expected hefty revenue collections from 3 G/BWA Auctions, better than expected tax collections due to better corporate results. This still does not include any revenue collections from PSU disinvestments
- Mechanism announced to free the petroleum pricing; thereby hugely reducing petroleum subsidy figures
- Possibility of more foreign inflows expectations due to up gradation of GDP numbers by IMF
- IIP numbers easing from a high of 16.5% to currently at around 11.5% & likely to go further down to single digit figure
- After peaking off at maybe 12.50%; inflation to soften due to base effect kicking in & going to higher single digit by September & to approx 6-7% by March 2011
- Demand/Supply of G Sec becoming more skewed in favour of demand in the year 2010-2011 than supply (reverse was the case for FY 2009-2010)
- In almost 6-7 years’ deposit growth is much lower than the credit growth. This can be attributed to aggressive borrowing by the Telecom Companies & also aggressive borrowing by corporates at large before the Base Rate policy becoming applicable on August 01’2010
- Even though there is merit in the argument that Short Term as an asset class has outperformed long term bonds or long term G Secs; there have been periods in which long end of the curve has hugely outperformed any other asset class including equities. Typical example is when we had recommended investment in long end in November 2008 & thereafter we had given an aggressive disinvestment calls between December 2008 end and January 2009 beginning by which time the investments in long term G Sec schemes had been hovering in the region of 20-25% absolute returns
- Hence, even going forward, one will have to be nimble footed and take advantage of this trading zones which comes up every once in a while
- I personally believe that we are in that trading zone range, wherein investors investing at current levels of 7.69-7.70% levels can expect, for reasons mentioned above, 10 year benchmark to soften further to between 7-7.25% levels by March 2011
- One need not literally have one year view and hold onto these investments for one year. Investor need to cash onto these opportunities & redeem (even if there are exit loads applicable in some long term bond funds) as & when they have managed to earn more than expected returns from this asset class
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