What to do when equity, bonds as well as cash hurts? Maneesh Dangi explains

"I still think that one will see about three to four rate hikes in India. But India’s main problem is high fiscal deficit. How are we going to borrow 10.5% worth of GDP equivalent of fiscal deficit? At some point in time, when the RBI sort of backs off, interest rates in India can rise very sharply. My view is that we will settle somewhere between 7-7.5-7.75 in a year’s time on the 10-year bond," says macro investor & advisor Maneesh Dangi.


A few months ago, you were talking about taking cash out of the equity market and buying farm land. You have also in the past talked about reducing your exposure to energy, particularly long crude. Has there been any change in your strategy? Where are you deploying your cash now?
From a macro asset allocation point of view, even in India, we are headed to a late cycle – a period in which there is high inflation and both bonds and equities are not doing too well. Thanks to inflation, even the cash will hurt. But there is a way to get 6-7% easily. It is for six more months and this is what I am doing with my own money also and, of course, for the folks that I manage this money for. I am still sitting on cash. A very large part is actually converted into dollars because there is a risk over the next three to six months for the rupee to back up and the US dollar to appreciate even now.


So, I would still wait out. The US treasury rate is moving from 1% to 2%. I would not be surprised if Indian 10-year bonds actually move towards 7.5% and state government bonds move towards 8% in the next 6 to 12 months. That is where one can make a reasonable bond bet, if the equities do not plummet by then.

About 10 days back, you had made the observation about what falls first and you said that the sequence of what breaks first is banks, then capex plays, then the rest of the financial plays and then urban consumption and then finally rural consumption. In the near term, the market may have found a durable bottom. Will the recovery be in the same sequence?
Absolutely and to a certain extent, the Indian banking cycle is experiencing a separate cycle. Its asset quality, unlike the US and Europe, perhaps would stay intact because they did not underwrite a lot of the risk in the last couple of years. Also, most of the past losses have been accounted for.

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Nonetheless, if crude were to settle at $120-130 which is not my base case, but if they do, that would depend on how fast is the escalation and what plays out. There is pretty bad news for banks. Right now, I continue to think that we are in a wobbly market. There’s a lot of volatility with no straightforward returns in the next 6 to 12 months and given that the current account deficit is 3-3.5% already, it is very unlikely that this level of crude and ammonia prices would be transmitted to Indian consumers because they will not be able to absorb all. This essentially means that there is almost a $60 billion worth of trade shock that India has had, which to a large extent, will be absorbed by Government of India.

This takes us back to the Budget day when we all were excited about the large capex play that India could have unveiled. The probability of that has come down dramatically. So government spending in capex, not just in India, but across the world, will be much less because governments would absorb this big energy shock. That is what Japan, Europe are doing and very likely India is going to do because we are not hiking our pump prices yet. The same thing goes with the fertilisers.

We will end up having the government spending a lot less in capex and therefore in this set up, even private capex will not come into play. So if one is betting on banking in hopes of industrial credit picking up, is going to get disappointed. If one is betting on capex here or anywhere else, one is very likely to get disappointed. I do not think we are out of the woods. Markets have rallied by 5-6% but I still would be careful about that sequence and I still think that that sequence plays out where I am not sure whether banking underperforms dramatically but the capex does.

Is this recovery also coming in with an assumption that the RBI is going to follow suit along the lines of what the Fed has done, now that the dot plot is indicating six more hikes this year but a 25 bps hike at least and if that were to happen, would the markets be able to digest that or have they already done so?
RBI’s reaction function has been a very interesting one. This time they are sort of edgy and they are flirting with markets. From a market standpoint, it is USD-INR. RBI is fine tuning a little bit of financial repression. India’s inflation is not low. It is 6%, of course, it is not as ugly as what we see in the US but we are very likely to see high WPI of 13% in India convert into high CPI over the next 6 to 12 months.

So I would not be surprised if we head towards 7% inflation. Our repo rate is 4%, the overnight rate is close to 3%. So there are very sharp negative interest rates in India. Now because everyone in the world is doing it, RBI is allowed to commit to that sin but in the end this too shall unwind at some point in time in knee-jerk fashion. But I have to admit that RBI has been right about practicing financial repression, meaning offering negative real rates to savers has not resulted in a run on their currency. So to that extent, they have placed growth ahead of offering real rates to savers.

The whole thing has been flipped for the US. It is placing financial inflation or price stability ahead of financial stability. In fact, yesterday, Powell actually made an argument that one has to tighten financial conditions to achieve the very goal of price stability. The reverse plot is in play in RBI. So far so good but I still think that one will see about three to four rate hikes in India. But India’s main problem is high fiscal deficit. How are we going to borrow 10.5% worth of GDP equivalent of fiscal deficit? At some point in time, when the RBI sort of backs off, interest rates in India can rise very sharply. My view is that we will settle somewhere between 7-7.5-7.75 in a year’s time on the 10-year bond.