Volatility in the Bond Market: A Major Risk
According to Adrian Mowat, EM Equity Strategist, the bond market is experiencing high volatility as it tries to return to a non-inverted state. This poses a significant risk for investors. However, the story for equities remains strong globally. The US economy continues to grow at a robust rate, and sales growth for US corporations is healthy. In emerging markets like India, there is a bullish economic growth story with declining inflation risk.
The Surprising Moves in Different Markets
It’s interesting to see that gold, Bitcoin, bonds, and equities are all rallying in this unique market. One surprising move is the bond market in the US. Bond yields were nearly 5%, but they have since dropped below 4.2%. This mispricing of bond yields is seen as a risk due to the strong growth of the US economy and the Federal Reserve’s unlikely change in interest rates until 2024.
The Next Big Concern: Volatility and Bond Market Corrections
The next big concern for markets could be volatility in the bond market leading to corrections. The extremely inverted US yield curve is worrisome, and people are too complacent about the long end of the curve. Bond markets continue to be a source of volatility and have been since the beginning of 2022.
Choosing Investments: Largecaps vs. Smallcaps
While those who are fully valued in the market are enjoying the party, those who are undervalued may be feeling FOMO (fear of missing out). There seems to be a case for buying laggards, including banks that have underperformed so far this year. However, small and midcaps should not be overlooked as their underlying economic growth story is strong. The underperformance of small and midcaps in India has been relatively modest compared to other markets.
The Environment for Investments
Looking ahead, the environment for the next 12 to 18 months favors being long equities. If there are any breaks in the global economy, the Federal Reserve has the flexibility to cut rates. This provides a safety net for equities and suggests that investors should avoid bonds. Cash investments at the short end can also yield decent returns.
Hot Take: Staying Bullish in a Unique Market
In this unique market, with rallying gold, Bitcoin, bonds, and equities, it’s important to navigate the risks and opportunities. While volatility in the bond market remains a concern, the global equity story is robust. Emerging markets like India offer a bullish economic growth story with declining inflation risk. When it comes to choosing investments, considering both largecaps and smallcaps can be beneficial. Overall, staying bullish on equities seems to be a favorable strategy for the next 12 to 18 months.
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