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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.