Expect high single-digit returns from fixed income over the next 12-18 months: Lakshmi Iyer
The fact is that fairness valuations increase and the rate of rate hikes is likely to slow down, which is the signal we got from the FOMC. Furthermore, India is also expected to reflect the same later this week. So do you make adjustments in portfolios based on the same?
If you look at it from a valuation perspective, there’s no denying that there could be room for markets to recover, but certainly at a high level, caution does installed.
Second, if you look at the landscape of fixed income in all categories, from liquid funds to very short-term funds to long-term funds, it has been around 3.5 to 4% for 12 months and probably around 4 to 4.5% for 24 to 36 months and may be a bit higher for the over a three year period, but the thing is that the initial high charge from the rate hikes was reflected in the losses to the market and that’s the which is why returns on fixed income securities looked weak.
Gradually from current levels as portfolio yields look attractive, domestic investors overall appear to be under-allocated or seem to be very much at the short end of the yield curve, so a case for adding allocations to the current situation and increasing the duration also makes a lot of sense.
Today, it looks like interest rates are approaching a peak, commodity prices are historically down. When we have these kinds of cases, what happens to the projected debt yields in both the corporate debt market and the government debt market for the next 12 to 18 months? Could they approach double digits or is that a bit weird?
The double digit return at the moment may be I’m a little myopic but I’m not in a position to look at that in the next two to three years as investors tend to realize the gross return on these portfolios , so if you look at the gross yield fixed income landscape available today, it’s in the rough region of six at around 7-7.5%. 6% is closer to the 90 to 100 day period and 7 to 7.5% is closer to the three to six year period.
So if we actually allocate between say now for the next 12 to 24 or 36 months assuming there was to be at least one favorable rate cycle, if not two, one is a fair assumption to take and we are actually starting to see the benchmark repo rate slide with a 12-month lag, it’s not impossible to expect high single-digit returns from fixed-income securities over the next 12-18 months.
So I think that’s the thing to keep in mind and the markets have this ability to discount some of these events long before they happen and that’s exactly what we’re seeing in the markets right now bondholders.
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