The massive borrowing programme of the Government triggered an instant reaction in the debt market. They need to borrow a large amount in February and March and an additional Rs 12 lakh crores the next year. Immediately the yields moved up sharply.
We are currently at the bottom of the interest rate cycle. For a debt fund going forward, more than 5-6% returns is unlikely for a 3 year period. Although RBI is unlikely to start raising interest rates any time soon, the Government's massive borrowing programme could put upward pressure on the yields. Further with all this liquidity, in due course, inflation could rise and trigger RBI raising interest rates again.
Hence for debt allocation, we need to look at Short Term Income funds and maybe other innovative products, like Liquiloans, etc.
In 2020, Gold was the best performing asset class. It has corrected about 15% from its peak. A part of it was a 5% cut in the custom duty on Gold. In the global markets too, gold prices fell as the dollar resurged on the 2nd wave of Covid, lower than estimated financial stimulus.
However Gold is one asset class that we are confident of doing well in the next 2-3 years. The narrative now is returning to normalcy, but global policy makers will continue to resort to monetary inflation, credit expansion and Government spending. These are the factors positive for gold in the next few years:
- Dollar weakening due to the stimulus.
- Governments buying gold. Russia has now more in reserve in Gold than the dollar.
- Supply is restricted because no new mines have opened.
- Inflation is likely to rise because of all the stimulus packages and Gold is a store of value.
The Budget hopes to transform our Economy from a weak player to a dominant one – however, it will all depend on the execution. The emphasis is on growth, growth, and growth.
- Growth oriented Fiscal stance for India's path to recovery.
- Highest capital outlay of the Central Government in both infrastructure and also PSU capex growth at 9%.
- Strategic disinvestment of some PSUs to unlock value.
The last quarter results have been better than expected. Although Sales were in line with expectations, there was a bumper earnings growth. Other positive news was:
- GST collections are at all time high
- Forex reserves have hit an all high
- Bank credit growth rises
- Exports grew over 5% in January
- PLI schemes can add 1.6% to GDP by 2027
- Real Estate should support Economic recovery due to increased affordability and low mortgage rates
Hence even though the valuations are expensive, the massive amount of liquidity in the system, FII buying and the increasing earnings could ensure that the markets can stay expensive for a long period of time. During most of 2006 and 2007, the equity markets continued to be very expensive and yet went on rising. We are expecting good earning growth over the next 2 years. We will have to wait and see if the earnings growth continues in the next quarter too.
The only problem would occur when the Federal Reserve starts tightening the liquidity again. During the Taper Tantrum of 2013, when the Fed announced tapering of quantitative easing - there was extreme volatility in the market.
Also we need to keep a watch on the rising interest rates and inflation, both of which can derail the growth process.
- Debt returns are going to be challenging the next few years. However it is still needed to bring stability to your portfolio.
- Gold, over the next 2/3 years should give decent returns.
- Equity - need to be in the equity market - hence can look to buy at each dip in the market.
- To take geographically, equity allocation can look at a diversified global fund too.
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