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Blackrock Investment Key message The Great Moderation, the four-decade period of largely stable activity and inflation, is behind us. The new regime of greater macro and market volatility is playing out. A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation. This keeps us tactically underweight developed market (DM) equities. We expect to turn more positive on risk assets at some point in 2023 – but we are not there yet. And when we get there, we don’t see the sustained bull markets of the past. That’s why a new investment playbook is needed. Themes 1.    Pricing how much of the economic damage is already reflected in market pricing. Equity valuations don’t yet reflect the damage ahead. We will turn positive on equities when we think the damage is priced or our view of market risk sentiment changes. 2.    Rethinking bonds. We like short term government bonds and mortgage securities. Long-term government bo...

  For the stock markets, the 2023 rd   year of Christ is beginning on a cautious note. The global narrative is swinging between an orderly decline to a precipitous crash. With the last man standing Haruhiko Kuroda (BoJ Governor) falling this week, it is clear that the “crusade” against inflation will continue in 2023 - and money will be expensive and tighter. This is most likely to reflect in slower economic activities, and aggressive trade and currency conflicts. The developed markets that have thrived mostly on the steroids of cheap and easy money will show withdrawal symptoms which may include volatility, recession, protectionism, financial instability etc. The emerging markets largely dependent on exports to developed markets (commodity or merchandise) shall also suffer the collateral damage. However, the emerging market with strong domestic economies, stable fiscal conditions and stronger financial markets might find themselves in a position to take advantage of flight of...

य :  सर्वत्रानभिस्नेहस्तत्तत्प्राप्य   शुभाशुभम् ,   नाभिनन्दति   न   द्वेष्टि   तस्य   प्रज्ञा   प्रतिष्ठिता One who remains unattached under all conditions, and is neither delighted by good fortune nor dejected by tribulation, he is a sage with perfect knowledge. —Srimad Bhagawad Gita, Verse 57, Chapter 2 In the calendar year 2022, a multitude of battles were fought. These battles materially impacted the global markets and investors. Some of the important battles were — (i)    Russia-Ukraine conflict that polarized the global strategic powers, threatening to unwind the post USSR globalization of trade and commerce; (ii)   Central banks’ battle against the multi decade high inflation, that resulted from the colossal monetary easing and fiscal incentives to mitigate impact of the Covid pandemic, while keeping the economy from slipping into recession; (iii)  China’s battle against Coronavirus, that kept ...

Equities – A year of consolidation The Indian equities consolidated the gains made during 2021 and are ending the year 2022 with marginal gains; unlike other major global markets which gave up most of the gains made during the year 2021. Considering the global economic, geopolitical and financial conditions this is a remarkable performance. The benchmark Nifty50 and Nifty Midcap 100 are ending the year with ~5% gain; though Nifty Small 100 has lost 2022YTD 11%. The market breadth has been marginally negative; and volumes below average. Nifty has now given positive returns in 9 out of the previous 10 years; with 2022 being the seventh consecutive year of positive return. Nifty averaged 17240 YTD2022, 8% higher than the average of previous year. This implies much better returns for the SIP investors. For long term buy and hold investors, five year rolling CAGR in 2022 is ~11.6%, which is close to 2016-2022 average. Five year absolute Nifty return in 2022 is ~73%, also close to 2016-2...

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) unanimously decided to hike the key bank rate by 50bps to 4.25%-4.5% target range, the highest since 2007. From near zero in the beginning of the year, this is perhaps the sharpest rise in rates in one calendar year. In the customary post meeting press conference, the Fed chairman Jerome Powell emphasized on the commitment to rein inflation. He said, “we still have some ways to go” and “I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,” indicating that rates will rise in 2023, though not at the same speed as 2022. The Fed chairman reiterated, “It is our judgment today that we are not at a sufficiently restrictive policy stance yet,” adding “We will stay the course until the job is done.” The Fed Chairman had stated after the November FOMC meeting that the pace of tightening is less significant than the peak and the duration of rates...

The global markets behaviour in the year 2022 would remain subject matter of analysis for many decades. Almost all markets – equity, bonds, commodities, crypto, housing, arts etc. - have shown a classical pattern in the current year, despite several unconventional factors impacting the global economy. If we observe from the averages the behaviour of commodity markets in particular has been very archetypal in a market still enduring a war, inclement weather and supply chain dislocations. S&P Goldman Sachs Commodities Index, has gained ~17% YTD 2022. Evidently, the first half of 2022 saw a sharp surge in commodity prices led by energy and food prices, ostensibly due to the Russia-Ukraine conflict and severe drought in many parts of the world. However, easing of post Covid logistic constraints and monetary tightening by most central bankers led to an improvement in supplies; demand destruction and unwinding of speculative positions; resulting in lower commodity prices.   However...

If you can look into the seeds of time, And say which grain will grow, and which will not, Speak. (Shakespeare, Banquo -Scene III, Act I, Macbeth) The past three years have seen an intense war between the forces of “Greed” and “Fear” in the financial markets. Both the forces have won some battles and lost some. Though the benchmark indices close to their all-time high levels might give an illusion of decisive victory of for the forces of “Greed”; but the negative market breadth, poor volumes, declining participation of the domestic institutions, net selling by the foreign institutions and underperformance of the broader markets in the past one year indicate that the forces of “Fear” have not yielded much ground. The period 2020-2023 has seen some localized bubbles in the markets, e.g., new age businesses (ecommerce, digital payments, gaming etc.), healthcare (Covid spending) and metals (supply shortages); which have been duly normalized without much damage to the overall market structu...

  The Reserve Bank of India made its last policy statement of 2022 on Wednesday, 07 December 2022. The next policy statement of the RBI is scheduled in February 2023. This statement was keenly watched, especially because of its timing. The RBI was expected to anticipate the impact of actions of the US Federal Reserve in their the intervening two meetings (14 th December and 1 st February 2023) and measures to be announced in the last full union budget to be presented before 2024 general elections scheduled to be announced on 1 st February 2023; and accordingly calibrate its policy stance. The Monetary Policy Committee (MPC) of the RBI noted that— (a)   The tightening of monetary policy by the global central bankers is causing the global growth to lose momentum and negatively impacting consumer confidence. The cost of living rising as inflation is persistent; though there are signs of pricing pressure easing due to monetary tightening. (b)   Capital fl...

  The Reserve Bank of India (RBI) shall announce the latest monetary policy stance of its Monetary Policy Committee (MPC). While the market narrative is focusing on the decision regarding change in the policy rates, I believe the decision “to hike or not to hike” may not be the primary point of deliberations over the past two days. In the past seven months since May 2022, RBI has hiked the key policy repo rate by 190bps. The benchmark bond yields or lending rates have not risen in tandem to the policy rates. Only the call money rates and bank deposit rates have seen a corresponding rise. This could mostly be a function of sharp rise in credit growth (now above 18%) at a time when RBI had reversed its accommodative stance and withdrawn over INR12trn of surplus liquidity from the market The benchmark 10yr treasury yields have fallen 25bps in the past six months. However, 3-6months bond yields have seen sharp rise of 135bps and 112bps respectively.   The hike in repo rate ha...