The Cycle of Greed and Fear
Ashutosh Bishnoi
Md & CEO

Investment markets proved their natural cyclical nature faster in the year gone by than perhaps ever before! From Greed to Fear to Hope and back to Greed in record time. Thanks to two opposite forces – the fear of the virus and the release of unprecedented liquidity into asset markets by all major economies of the world.

But is the worst over yet? Is there another edition of the disease just around the corner? Are we better prepared for any such episodes – at least mentally? And while Asia looks ready to move on, are the powerhouse western economies over the Corona hump? These could be the episodes yet to come in a continuing battle for human victory over disease.

We all know and understand the year gone by to be an aberration, but what will the near term hold for us as investors? Here is a factual and step by step recall of events and a tentative look into what lays ahead, by our equity and debt fund management teams that have successfully come through the worst without missing a step!

Debt Market Outlook: An Ode to Mankind
Rahul Pal
Head – Fixed Income

For as long as the current generation lives on, the year gone by would be discussed in our and the future lifetimes. The arrival of a global pandemic caused by a strain of virus, the altered human behaviour pattern and an overdrive towards a vaccine; a year certainly for the keep of memory. And as the vaccine arrives and gets approved; mankind may yet again prevail!

This note pens down the important events which shaped the market through this historic year and of course an attempt at crystal gazing.

Looking Back:

Market returns

The table below traces the returns of different fixed income indices through the past years:

Calender Year CRISIL 10 Year GILT Index Crisil Liquid Fund Index CRISIL Low Duration Debt Index CRISIL Short Term Bond Fund Index CRISIL AAA Long Term Bond Index
2016 14.97% 7.50% 9.04% 9.85% 13.29%
2017 -0.05% 6.66% 6.80% 6.05% 6.25%
2018 6.03% 7.58% 7.69% 6.65% 3.34%
2019 10.46% 6.86% 8.60% 9.53% 13.90%
2020 8.98% 4.58% 7.42% 10.33% 13.78%

Source: Bloomberg |Data as on December 28, 2020 | Past performance may or may not be sustained in future.

  • Global central bank balance-sheet expansion and liquidity deluge
  • The pandemic and associated global lock down prompted all major central bankers to follow a similar all-too familiar approach: expand balance-sheet by buying assets from the financial system and the liquidity deluge ensured lower /negative-bound interest rates prompting a risk-on rally.

  • Fall and the resurgence of commodities
  • The year witnessed a unique phenomenon in April 2020 as near term West Texas Intermediate crude oil touched closed at negative prices for the first time in the history of oil prices. The frenzied selling was driven by a lack of storage space to hold the crude; thereby resulting in the negative rates. While other commodities too fell in April 2020, as the year progressed the entire commodity basket (ferrous, non-ferrous, agri) witnessed sharp resurgences prompting fears of elevated inflation.

  • The fall of the USD dollar
  • The US dollar measured by DXY (a basket of 6 major currencies) depreciated sharply by around 7 percent through the year, prompting a surge in the metal and other commodity prices

  • RBI in action: the conventional and the out-of-box approach
  • The “whatever it takes” approach of the RBI to stimulate growth defined the overarching narrative of the Monetary Policy Committee (MPC) and RBI in CY20. This included several notable action of the central bank:

  • An accommodative stance for CY20 and extension of the accommodative stance through the next financial year. The RBI has never given such a long future facing guidance in its recent history.
  • A higher tolerance for inflation was witnessed as the MPC and RBI chose to ignore an elevated retail inflation for most of CY20 which came in beyond its mandate.
  • Cumulative rate cuts in repo rates by 115 basis points (bps) with repo rates at 4% and reverse repo rates cut by 155 bps with reverse repo rates currently at 3.35%
  • Cash Reserve Ratio (CRR) cut by 1 percentage point to 3 percent till March 2021.
  • Open Market operations conducted for both Central government and State government securities.
  • A surprising large buying of US dollars through spot and forward markets which prevented a sharp appreciation of the rupee.
The Debt Market in action:

    The domestic debt markets were dominated by these dominant themes:

  • Large parts of the money market rates remained anchored to or fell below the Reverse Repo rates raising concerns on higher inflationary expectations.
  • The large liquidity induced an extreme steep yield curve; the steepness was the highest seen in the last decade.
  • The spread across credits contracted due to the Targeted Long-Term Refinancing Operations (TLTRO) operations and the fund flows to the domestic debt funds.
  • The markets also coat tailed the RBI in its buying action and largely ignored the persistent high retail inflation with a view that the inflation was a transient phenomenon.
Looking Ahead – Crystal Ball gazing
  • Assumption of Normalcy
  • A large part of crystal ball gazing rests on a single edifice: normalization of the domestic and global economy prompted by successful vaccination across the globe. Should the efficacy of the vaccination or a new strain of the virus emerge; all forecasts could come to a naught!

  • The bottoming out of interest rates:
  • We feel that interest rates have bottomed out and may move up through the next year. With inflation rearing its ugly head, the probability of inflation getting entrenched remains highly likely.

  • Crude Oil – the possible move up
  • We believe as situation normalises the next year, the probability of crude moving higher remains a distinct possibility. With a surge in commodity prices well underway, the market may get surprised by a surge in crude prices complicating the conduct of domestic monetary policy.

  • The RBI –will they; won’t they
  • To clarify upfront, we are not talking of increase in the policy rates. But we think with global commodity prices holding up and the potential of inflation remaining at elevated levels; it may complicate the MPC’s accommodative stance through the next financial year and may force it to acknowledge the higher inflation into its policy construct.

  • The normalisation of the yield curve
  • There exists a distinct possibility of the yield curve flattening, credit spreads expanding and the money market rates dropping the reverse repo anchor as we move ahead to a normalisation of the domestic and global economy.

Equity Market Outlook: What a Year!
Krishna Sanghavi
CIO - Equity

A brief summary of markets in 2020 can be captured in four parts:

The market phases during the year shifted from optimism to complete disbelief, to hope and back to optimism. CY21 will tell us whether the optimism moves to euphoria or stays at optimism or moderates to hope!

A big learning for investors across the world has been the role that liquidity plays to bridge the gap between fundamentals on one side and sentiments on the other.

  • Q1CY20 (Jan, 2020 - March, 2020): The fundamentals turned weak (economy, medical), the sentiments collapsed as the “Low Tide” of liquidity suddenly made things look far worse for the immediate term and the valuations in the medium- to long-term disappeared in the FEAR.
  • Q2CY20 (April, 2020 - June, 2020): The fundamentals remained weak/worsened (both on economic and healthcare front), while sentiments started recovering as the “high tide” of liquidity emerged and started covering the immediate term issues. The valuations became acceptable.
  • Q3CY20 (July, 2020 – September, 2020): The fundamentals on economy started improving while on the medical front the expectations of vaccine gained ground. The sentiments turned to normalcy as the “high tide” of liquidity simply forced investors to ignore the near-term concerns and look at normalized earning valuations to justify the purchase.
  • Q4CY20 (October, 2020 – December, 2020): The fundamentals on economy turned normal, while on the medical front the vaccine arrived. The sentiments turned to super-normal as all the hopes got built up together – Economy growth in next 12 month and medical solution of vaccine.
Looking Ahead :

It is important to keep in mind the liquidity-driven sentiments while analysing fundamentals and valuations. What is important is to understand is whether liquidity is driving fundamentals or fundamentals are driving liquidity. If it is the former, then valuations are running high and if it is the later, then valuations are reasonable and attractive.

Fundamentals : Attractive
  • Corporate profitability is at multi-year high that too in a year of economic contraction.
  • A depressed base of economic activity can support strong recovery in Q1-Q3CY21.
  • Reforms have created the necessary space to generate a corporate capex cycle that has potential to start a virtuous cycle of uptick in jobs and incomes, resultant rise in spending, which again puts corporates into the capex mode
Valuations : Premium

In a world driven by excess liquidity and low/negative interest rates, investors may be keen to look at longer-term growth opportunities and willing to pay for that growth visibility. Indian economy and markets are precisely at that juncture.
An immediate outcome of this can be that valuations take backseat. Ability/willingness of any investor to overpay (i.e. buying at higher valuations) is a function of -

  • Growth visibility over a longer-tenure
  • Alternate investment opportunities (i.e. negative rates)
  • Liquidity in financial markets

With a positive demography of over 1.35 billion, India offers one of biggest consumption market as well as an employable youth power to meet global needs as world population is ageing much faster. This has implications not only for economy but also for financial markets as capacity creation and consumption of the same would happen more in India relative to the world. Investors like pension funds looking for that 2030 year investment opportunities are keen to invest in India. CY20 saw the best-ever investments in India (both foreign portfolio investments and foreign direct investments).

Liquidity : Trump Card

Globally the capital is in abundance and looking for growth avenues. Ignoring the brake applied by Covid in CY20, India retains its position among growth leaders in the world economy. India’s economic growth is estimated to make India among top 5 economies in world by 2025 and top 3 economies by 2030. We believe this growth potential will continue to attract capital that is in active search of growth destination.

In addition to this, we also see an interesting opportunity for capital that is in search of passive growth. Over past decade, Global index providers like MSCI & FTSE have emerged as a popular allocator of capital for investors with passive approach to investing. There are ETF’s that track the indices offered by MSCI n FTSE and investors are happy to participate there. We believe that even index providers would be enforced to recognise India’s rising economy and add more weight to India as a country in the global indices. This increase in weight could attract more capital that believes in passive tracking. To highlight, as on 30th November 2020, MSCI Emerging Market Index has India’s weight at 8.09% while China is at 40.72%.


So here we are, long-term attractiveness has been priced in very quickly, thanks to the liquidity. We believe that liquidity while it can be respected, it cannot be trusted to stay forever as it is generated by some action somewhere else in the world. So yes, we need to be watchful in the next 6-12 months, while we should be comfortable with the medium- to long- term investment horizon.

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