Monday, January 02, 2023

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He also manages the All-Weather portfolios.

How about Debt for 2022?

2022 was rather challenging as high inflation and central bank aggression led to poor performance and/or high volatility across asset classes. However, in 2023, we see an opportunity for attractive returns in fixed income. A few reasons why:

  1. There are signs that inflation is easing, and we’ve seen the RBI (and Fed) already slow their pace on rate hikes
  2. The impact of rate hikes that happened over the last year is yet to properly negatively show up on economic growth and corporate earnings
  3. The probability of rate hikes stopping in 2023 is legit, particularly in economies with a higher rate sensitivity and/or better recovery from inflation (read: India)
  4. Yields are a lot higher right now, compared to last year, and bond valuations are attractive

Overall, 2022 proved to be a difficult year for the markets. However, the market pain has led to higher yields and an attractive environment from a valuation standpoint.

As always, timing will be critical. A confluence of lesser weightage on inflation, visibility on monetary policy reversal and attractive valuations is likely to result in good returns on fixed income.

<aside> 💡 Our View: At some point during 2023, we see a great opportunity emerge for fixed income. In the backdrop of high valuations on equities, and unfavourable risk-reward on other asset classes (a case for continued trouble in international markets, a fall in commodities with inflation, and difficulty in real estate owing to higher rates), debt looks like an attractive bet for the year.

</aside>

Idea - Yes Bank ✔

A leading emerging corporate and retail bank, Yes Bank was marred by promoter violations, governance issues and bad loans, leading to the loss of share value by 97% between 2018 and 2020.

Eventually, the government stepped in and a restructuring scheme was implemented with SBI and other lenders, under which the bank is implementing a resurrection.

Here are the reasons why we think Yes Bank is a lucrative investment option:

  1. In March 2020, the GoI implemented a reconstruction scheme to grow deposits, enhance liquidity buffers, optimise costs, and resolve asset quality issues. After making significant progress, Yes Bank exited the scheme in 2022
  2. Under the new leadership of Mr Prashant Kumar, management has been stabilised, while also focussing on making changes to the underwriting framework and corporate governance