Fed raises rates, FinMin raises taxes, What we are reading & More

🔆 Saturday Coffee Newsletter

• Market Overview: Top stocks & asset classes
• Twitter Space: Debt Fund Investors need to shell out more tax
• World View: Fed raises rates again, what does this mean?
• Good Reads: 5 good reads on investing & finance
• Pop Quiz: Answer and win a cool prize!

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What’s up with markets? 📉📈

Crude is back to a point where it was before the Russia-Ukraine war and hence you see that big red horizontal candle at 1Y time frame, in the below chart. This week, Nifty 50 was down 1% and is flat over the last 1 year while other asset classes were up marginally.

Let’s look at the market from the POV of Nifty sector indices. This week, Pharma & FMCG, were up a little while the overall market fell. On the other hand, IT, Metal, and Realty indices were the biggest losers.

Interesting to see the IT index falling by 24% over the last 1 year, while it has had a fantastic run in a 5 year time frame.

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Fed raises rates again, what does this mean? 🏦

To only a few’s surprise, the Fed hiked interest rates by 25 basis points to a 4.75-5% range this week, in what is now its ninth hike in interest rates in a row. What’s more interesting: Chairman Powell was quoted saying

“We no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation; instead, we now anticipate that some additional policy firming may be appropriate”

A lot has already happened this month, but the fed believes inflation is still high. There are still no clear signs of a reversal path; the Fed will probably not pivot to cutting rates just yet, but at best keep rates at the same levels.

Yields still stand inverted in the U.S., which has been a reliable predictor of economic downturns in the past. What this implies is, the debt markets anticipate more uncertainty in the next two years and demand higher yields for the shorter term than the longer term. The yields on the U.S. Government’s 10-year bonds are at 3.29% versus the 2-year bonds which now trade at a yield of 3.6%.

But the bigger question to ask here is if rates stay in the same range, does it change much for industries? At 5%, the rates are still high. The tightening is still on; money is available but at a higher cost. Even with the new Bank Term Funding Program, the current rate is at 4.88%. The credit growth in the U.S. for all commercial banks has dropped from more than 7.4% three months ago, to 4.5% now.

What does the U.S. rate hike mean for us back home? Inflation in India is slowly coming down but is still above RBI’s target range. It may hike rates again at the April monetary policy meeting, and its decisions are likely to be influenced by inflation prints.

Same as in the U.S., the RBI may pause in the near future but is unlikely to dramatically decrease rates unless there’s a recession. When it does pause, the long-term yields may come down a little, with markets anticipating cuts at some point. Short-term yields still may have a long way to go and could see a higher rise. Corporate credit spreads could widen, from 20-30 bps now to nearly 100 bps.

We’re at an interesting phase where everybody was afraid of breaking something. With things starting to break, the next thing to look out for is contagion. If there is no major contagion, we should be close to being done.

We did a detailed video discussing the impact of the latest rate hike.

Watch: That Fed rate hike: And how it could impact India

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What we are reading 📝

• We analyzed (almost) all Nifty Equity Indices since their inception, that’s 53 indices across Market Cap, Sector, Thematic, and Factor-based.Find out which Nifty indices have robust long-term performance. Read: Quick look: Performance of NSE Nifty Indices
• When faced with a problem, rarely do people ask, “What is the best, perfect, answer to this question?”. Read: Psychological Paths of Least Resistance
• Intuition usually fails us when it comes to investing. Read: Want to Invest Successfully? Quit Trying to Make Sense of It
• Many people assume Warren Buffett’s investment strategy is a big secret–but it’s actually not a secret at all. Read: How to Invest Like Warren Buffett
• Bing AI is a huge leap over ChatGPT, but you have to learn its quirks Read: Power and Weirdness: How to Use Bing AI

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Debt Fund Investors need to shell out more tax 🚨

The new Finance Bill amendment affects debt funds, Gold funds, International equity funds, and FoFs.

Starting 1st Apr 2023, the indexation benefit is gone, with all funds taxed at STCG regardless of holding tenure.

We did a detailed Twitter space with Deepak Shenoy on this topic.

Listen In: Twitter Space – Tax changes in debt mutual funds

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