Investors Eye Fed Rate Cut On September 18 | NDTV Profit - video Dailymotion

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00:00Today, you know, live from studio, we're joined by Mr. Amit Goyal, who is the co-founder and

00:05chief global strategist at Pace360.

00:08Welcome to the show, Amit.

00:12You know, my first question to you is that, you know, we are expecting a Fed rate cut

00:18soon.

00:19You know, what kind of, in terms of quantification cut are you expecting and how quickly are

00:25you expecting that?

00:26Firstly, thanks for having me on.

00:29So see, if you talk about the markets, then the probability right now is that there is

00:35going to be at least a 25 basis cut, which is almost like 100%.

00:41And there is about a 32, 33% probability for 50 basis points.

00:47I'm of the opinion that it's going to be 25, while the recent data which has come out in

00:55the last few weeks is very suggestive that Fed would have to get aggressive at some point

01:04of time in the next few months.

01:07But I think Fed would probably gravitate towards a 25 basis points, just like they did a 25

01:15basis points hike in March 22, while there was pretty strong evidence that the inflation

01:24is here to stay and it was really beyond the comfort zone of Fed.

01:29So similarly, I feel that while the data is very suggestive that Fed should become very

01:34aggressive, but probably they'll start with 25, they will see how things go for another

01:39few weeks.

01:41And then maybe at some stage in the next few months, maybe we get a 50 basis points cut.

01:48But considering that the economic data, while it has been on the weaker side, but it has

01:53not been so weak that Fed should get into some sort of an emergency or an urgency mode.

02:00My sense is that they'll begin with 25.

02:03But at some stage, maybe in the next six months, we may expect a 50 basis points cut as well.

02:09So cumulatively, you're expecting a 50 basis points cut over the next six months or so.

02:14Is that the right way to approach it?

02:16Slightly more than that.

02:17So markets are discounting more than six cuts by March, which is a huge number.

02:26Somehow considering the fact that the economy is not that weak, I don't think we'll get

02:33a negative GDP reading in a quarter, at least for the next, maybe at least two quarters.

02:42So my sense is that they will not do that kind of aggressive cutting that they cut six

02:49or seven times by March.

02:52But we are expecting about four rate cuts by March of 25.

02:58And we do expect that by September, October of 25, Fed will be a lot more aggressive in

03:06the rate cutting because we sense that U.S. could get into a recession sometime in the

03:12middle of 25 if that were to happen.

03:15And if we get a negative GDP reading or if we get a negative jobs reading in a particular

03:23month, I think Fed will become pretty more aggressive.

03:28And maybe by October of next year, we get something like 150 to even 200 basis points

03:34of cuts.

03:36But by March, we are not expecting more than four rate cuts.

03:38Interesting.

03:39And so then what do you expect, like considering all of these trends, you know, of course,

03:44you're saying that up to 200 basis points rate cut, of course, from a long-term perspective,

03:50do you expect RBI to follow the same?

03:53RBI probably doesn't have that kind of leeway because we must bear in mind that the repo

04:00rates in India went up by only 200 basis points, while U.S. Fed took up the rates by more than

04:07500 basis points.

04:09They actually took it up by 525 basis points.

04:12So on the way down, I think Fed probably by 2026, we expect that the Fed fund rates would

04:22come down to 2%.

04:23So we are actually looking at a reduction of almost 300 to 325 basis points by 2026.

04:31But I doubt that RBI would go below 5.5%.

04:38So we are looking at four rate cuts in India for maybe about 12 rate cuts in U.S. over

04:46the next two years.

04:48So which means that for every 50 to 75 basis points of rate cuts in U.S., you should not

04:56expect more than one rate cut in India.

04:59So our expectation is that the repo rate comes down to about 6% by, let's say, April oblique

05:07May of 2025, and by 2026 middle, we expect RBI repo rate to be around 5.5%, but not much

05:19below that.

05:20All right.

05:21And Amit, with regard to the spread between the India and the U.S. bond yield, before

05:26we go into the impact on markets itself, just the spread between India and U.S., historic

05:35lows, does that continue?

05:38Yeah.

05:39So that's a brilliant question, Harsh.

05:41So if I look at 10-year bond yield, for example, U.S. went up to as high as 5% last year, last

05:51year October, and we did not go above 7.4, 7.5.

05:56So at that point of time, when U.S. rates were at their highest, the spread was about

06:02250 basis points.

06:04Right now, the 10-year in U.S. is about, let's say, 360, 365, while we are at about 684 today.

06:13So that spread is, let's say, it has gone up.

06:18So we are at more than 300 basis points.

06:21So we are at about 320, 325 basis points as we speak.

06:27My sense is that this spread will actually go up because the rates will fall lesser in

06:33India than they would fall in U.S., just the way that on the way up, U.S. rates went

06:39up from 1% to 5% for a 10-year yield, while we went up from 5% to 7.5%.

06:46So similarly, on the way down, India will go down less, which means that the spread

06:50between India and U.S. 10-year bond yields is actually going to go up over the next one

06:55to two years.

06:56How much, Amit, if I can just briefly touch that?

06:59Yes.

07:00So we are looking at 10-year bond yield to come down to about two-quarter by 2026, and

07:07we do not think that Indian 10-year at that point of time would be less than 6.1, 6.2.

07:18So 6 will still continue to be that gap, difficult to kind of bridge that.

07:22Yes.

07:24You would need a protracted recession in U.S., and you would need the rate cuts to

07:30happen pretty aggressively, and you would need the rates to remain low for an extended

07:34period of time in U.S. for Indian bond yields to go below 6%.

07:40Otherwise we are assuming that by 2026, we may come down to 6, 6.1%, but not significantly

07:48below that.

07:49Sure.

07:50So, Amit, now I want to understand that, you know, where are you investing currently?

07:54And I also want to understand that when it comes to alternative assets, what is the best

07:59way to play that theme, like which are the best pockets to invest in?

08:03So when you talk about alternative assets, you mean to say non-equity assets?

08:07Right.

08:08Okay.

08:09Fantastic.

08:10So we have been very, very bullish on gold for the last two years, and gold has gone

08:15up from $1,612 to about $2,500, so it's gone up by more than 50% in two years' time.

08:25And we have been very bullish on long-duration fixed income, sovereign bonds, both in India

08:32and in U.S. for the last one year.

08:35And the returns have been pretty extraordinarily there as well.

08:39But the sense which I get is that market has become a bit too dovish over the last couple

08:46of months.

08:47So when the market is expecting six rate cuts in U.S. by March, I think the market may be

08:55a little disappointed at some stage in the next few weeks and months.

08:59So we are actually in the process of reducing our duration, not because we are not bullish

09:05on fixed income for the long term, but we believe that this fall has been pretty swift

09:12and fast, and we may become sideways in the long-term bond yields for some time, and that

09:18is in spite of the fact that Fed is going to do a rate cut next week.

09:22But in spite of that, I think the bond yields do not have too much to go down over the next

09:28two to three months.

09:29So what we are now doing in our portfolios in India and globally is that we are actually

09:36reducing our exposure to gold.

09:38We are actually reducing our exposure to long-term fixed income, both in India and

09:43in U.S.

09:44So we are booking some profits there.

09:47So only short-term debt, Amit?

09:48Sorry to interrupt.

09:49Yeah.

09:50So short-term debt, because we must realize that the carry is very, very negative.

09:56So in U.S., the short-term rates are 5.25%, 5.3%.

10:01And the 10-year bond yield is at 3.65%, right?

10:04So there is a negative carry of almost 160 basis points.

10:08If I look at India, your 10-year GSEC is at, let's say, 6.84% as we speak, while your ultra-short

10:16and your short-term, your money market funds are giving you about 7.6%, 7.65%.

10:22So the negative carry is about 80 basis points, because we invest a lot of money in corporate

10:28bonds, and there the yields are easily 9.5% to 10%.

10:32So the negative carry is almost 300 basis points.

10:35If I were to compare the 10-year GSEC yields with the corporate bonds.

10:40So what we are doing is, we are trying to enjoy a higher carry right now, reduce our

10:45exposure to gold, reduce our exposure to long-term fixed income, with the intention of getting

10:51back into them when the market is somewhat less sanguine about the rate cuts.

10:56Now coming to your question about alternative assets and about where we are now positioned.

11:01So we are actually sitting very low on equities at the moment, because not just in India,

11:05but globally I feel that equities are pretty highly valued, and the markets are not taking

11:12recession as a very serious possibility over the next three to four quarters.

11:16While we differ in our assessment, we believe that the chances of US getting into a negative

11:21GDP growth rate quarter is extremely high, as high as 70% to 80% over the next three

11:28quarters.

11:29So our assessment of the global macros is a little different from the way markets is

11:34assessing it, which is why we find the current valuations way too high if the US were to

11:39actually go into a recession over the next three to four quarters.

11:42So we are low on equities.

11:44So right now we would just enjoy the short-term carry, which is still very attractive in India,

11:48very attractive in US.

11:50And we will get back into fixed income long-term.

11:53We will get back into gold once there is a little bit of cool-down.

11:58And we will also buy equities when there is a relatively deep correction, just like we

12:02saw in early August, when there was a swoon in the markets, there was a yen carry trade

12:07reversal, and nifty went all the way down to below 24,000.

12:11And we increased our equity exposure in India dramatically at that time, and similarly in

12:16US.

12:17But we have booked profits on most of those positions over the last few weeks.

12:20And we will be looking for next such opportunity in the next few weeks and months.

12:24Right.

12:25And Amit, if I can just very quickly get your take, gold versus silver, just one word.

12:30I would definitely say gold.

12:32Gold.

12:33Okay.

12:34Thank you so much, Amit.

12:35It's been a pleasure.

12:36But with that, completely out of time on this edition of The Smith Show.

12:39From Mahima, myself, thanks so much for watching.

12:43Thank you, Amit, for coming in.

Investors Eye Fed Rate Cut On September 18 | NDTV Profit

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