If yields must sell off further, are we looking at 8% and beyond for 10-year bonds? If currency must go lower, are we looking at levels of 82-83 and if equities must correct, are we looking at a 10-15% correction in Nifty?
On bonds, we have a clearer sense of where it begins to hurt economy significantly and the last 20 years of experience suggest that once they go past 8%, we do not know where it will end. Invariably at least thrice in the last 20 years, it ended up at 9%. They stay there for a very short period and sort of retrace.
My sense is that we would easily get 8% in this macro cycle given the fiscal dominance and of course the mess of inflation in India but after that, how much more can it go? For an investor, 8% plus on government bond is a cool deal. Where will it peak? In my own assessment of what I understand of bond markets. I think they will peak closer to 8.5%-8.60% in this cycle. But then, I would not be too cheeky about it above 8%.
It is a good dial. Pick up a good state development loan or PSU bank portfolio of mutual funds and that is a good deal for you. On currency, I am afraid a lot of macro adjustments still must happen. Please understand that in the set up that we are in, where financial conditions are too tight, they are likely to get much tighter in emerging markets such as ours which are energy deficient and cannot afford.
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I cannot afford to run a $100-$125 billion of current account deficit. I think we are dreaming if we think that without a major macro adjustment through currency, we can go past this period. The currency will have to adjust. We are living through a period where there is an impossible trinity: if we have to save currency, we will have to sacrifice bond significantly.
If you have to save bonds, we will have to sacrifice equity and if you have to save equity we will have to sacrifice currency significantly. So my sense is that is the best thing for RBI and I have made this point many times over that the pivot to weakening currency dramatically from here anyways foreigners are actually leaving you and they will continue to leave for reasons which are very fundamental and we can discuss them separately.
As for equities, this is going to be positioning driven purely because far too much money has come in with the naïve belief that equities can deliver and compound and triple your money every three-four years. It is one of the misperception, miss-sold and all of that money to a certain extent would have to meet the fate of a possibility where they have very disappointing one-two years and which is why I am afraid a final flush would mean a significant drawdown in equity.
How much may be 10%, 20%, 25% I do not know but there could be a significant flush. More specifically, in smallcaps and midcaps even though they have corrected significantly but in general, I would not be surprised if it happens.
The 8% bond yield you know you started talking about 8%, if I am not mistaken six to seven months ago and now you are saying that the foreign investors would continue to sell. We started to see the foreign investors selling come down. They are still selling but the way they were selling has come down but it seems the pain is very much going to continue. We need to keep relying on the shock absorbers which are the domestic investors?
Absolutely, I do not know what we have discussed but I have made this point many times that do not look at foreign investor’s reaction function through the lens of you being rich or cheap or you are a high growth or low growth economy.
I want to explain this in a very simply manner; who is the one who is selling? When people retire, they sell equity because they are the ones which, particularly in developed market, have allocated significant amount of capital and they are exiting. But who is the one buying? A guy in late 30s and 40s is incrementally saving a lot of money and has A risk appetite to buy equity. Basically, the buyer and the seller are these two fellows during a lot of volatility and billions and dollars of volumes. The truth is that the old guy is selling and the young guy or a middle-aged guy is buying.
Now the answer is what would foreign investors do? Is that where they come from? They come from places where the population is aging and my sense is that in the US particularly, the boomers are now retiring en masse and that is true for many other parts of the world including China and they will be incrementally selling. Their capital was the one business coming to you for last 20-30 years because they were saving lots of money. Now that they are retiring, they are going to be selling in Argentina, Mexico and the US.
So, as I said earlier, foreign investors are not the friends to bank with. They are not going to be coming back. Maybe they will have a cyclical upturn here and there in ETFs but the broad narrative for me for the next many years and decades is that foreigners will continue to exit and they are no more key support for Indian markets. So, be careful of places where they flooded and gushed in their money and actually floated and bloated the asset valuations. The reverse would continue to play for the next many years.
Six-seven months ago, you said the best thing one can do is buy farmland. Do you still believe that?
Yes, but prices are 40-50% higher and even higher since October when I talked to you about it. The ideas was that it gets to be a non-core inflation hedge because I was anticipating high crude and high fuel prices. How does one allocate? One can buy a lot of pulses and may be crude tankers but the other simple was a farm land, because yield would go up if the tomato prices and onion prices actually go up. This is what I anticipated and that has played out.
Farmland is a proxy of inflation. If the non-core which is food inflation goes up or energy inflation goes up, farmland does well. My sense is that it will continue to do well. It also had seven-eight years of bear market and to a certain extent, relative to financial markets both residential real estate as well as farmland is relatively cheaper. It is sort of a small allocation and for individual investors it makes sense.