Expect a high single digit return from fixed income over the next 12 to 18 months: Lakshmi Iyer
The fact is that equity valuations are going up and the pace of rate hikes is likely to slowdown which is the signal we have got from FOMC. Also, India are likely to mirror the same later on this week as well. So are you making adjustments in portfolios in line with the same?
If you look at it from a valuation perspective one does not deny that there could be elbow room for markets to edge up but certainly at an elevated level caution is building up.
Secondly if you look at the landscape of fixed income across categories from say liquid to ultra short term to the long duration funds it has been in the region of say 3.5-4% for 12 months and probably around 4-4.5% range for 24 to 36 months and may be a tad higher for the three year bucket but the fact is that the high end front loading of the rate hikes has reflected in the mark to market losses and that is the reason the fixed income returns have looked muted.
Incrementally from the current levels given that the portfolio yields are looking attractive, domestic investors by and large seem to be under allocated or seems like they are very much at the short end of the yield curve so therefore a case for adding allocations at the current juncture and increasing the duration also makes a lot of sense.
Today it looks like interest rates are nearing a peak, commodity prices are down historically. When we have these kind of instances what happens to the projected debt returns both in the corporate debt market and in the government debt market for the next 12 to 18 months? Could they be nearing double digit or that is slightly outlandish?
Double digit return right now may be I am a bit myopic but I am not able to envisage that over the next two to three years as investors tend to realise the gross yield of these portfolios so if you look at the fixed income landscape of gross yields available today it is in the ballpark region of six to about 7-7.5%. 6% is for closer to say the 90 to 100 day bucket and 7-7.5% is closer to the three to six year duration bucket.
So if one actually allocates say between now for the next 12 to 24 or 36 months assuming that there were to be at least one favourable rate cycle if not two, one is a fair assumption to take and we actually start seeing the benchmark repo rate sliding down with the lag of 12 months then it is not impossible to expect a high single digit returns from fixed income over the next 12 to 18 months.
So I think that is what one needs to keep in mind and markets have this ability to discount some of these events way ahead of its happening and that is exactly what we are seeing in the bond markets right now.
