The biggest factor driving assets this year would be the rate decisions by US fed, and the resultant bond yields globally. In spite of repeated warning from Fed over the potential rate hikes coming soon, US bond yields have started to move lower. This is primarily on the back of fall in crude prices globally. How this will play out would be anyone's guess, but things can get pretty complicated by mid year.
A crash in price of any asset drives volatility in the market, and it would be same this time with the fall in crude. A lot of sovereign wealth funds of the crude exporting countries have been big buyers of assets in last few years - both fixed income and equities. Now, some of these funds would need to offload these assets in the market. I would think this would drive a lot of high yield stuff lower - be it EM bonds or EM equities. Now, it would be interesting to see how Fed acts in the event of these EM selloffs - will they pause and give more time to the market, or begin with their normalization. This would be the single biggest event for the markets this year.
Back home in India, RBI is widely expected to cut rates soon - either in the Feb meeting, or soon after the budget. Presently, the rate is 8%, and bonds yields have already started pricing in a cut (yields around 7.85%-7.9%, moving lower from ~8.5% last year). A fall in crude would lead to cut in deficit as well as inflation levels, and should be good for the bonds. I'm expecting 10 year yields to move to 7.5% by mid year, and to around 7% by mid of next year. There would be a sell off some time in the first half in risk assets globally, but my assumption is INR bonds may be a better bet here than equities.
However, a sell off in the market may lead some pressure on INR bonds and RBI may be forced to not cut very aggressively in event of disorderly moves in the market. Lets see how this plays out - I'm buying some bond funds, and would see how their returns pan out over the next 3-6 months. My target by mid year is around 6-8% gain, and an annualized gains of around 14-16% by mid next year.
A crash in price of any asset drives volatility in the market, and it would be same this time with the fall in crude. A lot of sovereign wealth funds of the crude exporting countries have been big buyers of assets in last few years - both fixed income and equities. Now, some of these funds would need to offload these assets in the market. I would think this would drive a lot of high yield stuff lower - be it EM bonds or EM equities. Now, it would be interesting to see how Fed acts in the event of these EM selloffs - will they pause and give more time to the market, or begin with their normalization. This would be the single biggest event for the markets this year.
Back home in India, RBI is widely expected to cut rates soon - either in the Feb meeting, or soon after the budget. Presently, the rate is 8%, and bonds yields have already started pricing in a cut (yields around 7.85%-7.9%, moving lower from ~8.5% last year). A fall in crude would lead to cut in deficit as well as inflation levels, and should be good for the bonds. I'm expecting 10 year yields to move to 7.5% by mid year, and to around 7% by mid of next year. There would be a sell off some time in the first half in risk assets globally, but my assumption is INR bonds may be a better bet here than equities.
However, a sell off in the market may lead some pressure on INR bonds and RBI may be forced to not cut very aggressively in event of disorderly moves in the market. Lets see how this plays out - I'm buying some bond funds, and would see how their returns pan out over the next 3-6 months. My target by mid year is around 6-8% gain, and an annualized gains of around 14-16% by mid next year.
