Stocks or bonds? Where to invest in a rising interest rate scenario

Stock and bond markets were mired in uncertainty as global central banks turned off liquidity taps even as they watched weak economic growth due to the war between Ukraine and Russia.

Three months into the new calendar year, national benchmark returns remain flat.

Overall, benchmarks in Japan, China, the US, UK, Russia and Europe gave negative returns between 7% and 31%.

In the money market, US 10-year bond yields have edged up more than 70% so far this year, while domestic yields have tightened 11.5%.

A rise in bond yields indicates losses on the bonds an investor already owns.

And the road ahead doesn’t get any easier.

Analysts say the problem for equity investors is that they don’t know exactly where the peak of inflation is.

Fixed income or bond marketson the other hand, fear that aggressive monetary policy will hurt the economy, animal spirits and consumer demand.

As Akash Prakash pointed out in a Business Standard opinion piece, we are entering a dangerous phase for the US economy and markets. If the US yield curve inversion persists for 90 days, US markets enter a significant decline, equity markets around the world will struggle until differentiation sets in and fundamentals prevail again .

At home, the RBI’s monetary policy committee retained its dovish stance but changed the wording to remain dovish while focusing on withdrawing dovish to ensure inflation remains within target at the moment. ‘coming.

Analysts said this suggests the RBI will likely change its policy stance to neutral at the June MPC meeting, paving the way for a short rate hike cycle in the second half of 2022.

Against this backdrop, where should investors put their money in a scenario of rising interest rates?

Vijayakumar also indicates that financials may also perform well in FY23 as rising interest rates will support interest income.

However, if someone is risk averse and prefers the debt market to stocks, Sunil Subramaniam suggests investing in floating interest rate bond systems.

Clearly, the markets are in a frantic race until the inflation scenario becomes clearer and the war between Ukraine and Russia ends with a mutually agreeable solution.

Given this, the movement of bond yields will dictate global equity markets in the near term.

On Wednesday, markets will react to retail inflation data from India and the United States, and follow the fourth quarter results of the large computer company Infosys.

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