Presentation on Decoding Economic Cycles & Yield Curve
1 like346 views
The document explores the relationship between economic cycles and yield curves, emphasizing how different shapes of the yield curve can inform investment strategies during various stages of the economic cycle. It details phases such as recovery, expansion, late stage, and slowdown, and suggests investment strategies for each phase, highlighting the current expansion phase with moderate interest rate expectations. Additionally, it provides specific recommendations for bond and mutual fund investments in the context of the prevailing economic conditions.
Presentation on Decoding Economic Cycles & Yield Curve
- 1. DECODING ECONOMIC CYCLES & YIELD CURVES
- 2. Introduction bonds of various tenures – forms interesting patterns depending upon 2 Learning the various shapes of the Yield Curve in different stages of the economic cycle can offer insights useful in investment planning. Interest Rates move with changes in the economic cycle. The ‘Yield Curve’ – a line graph created by plotting the interest rates of the state of the economy.
- 3. Economic Cycles and the Yield Curves 3 Recovery Late Cycle Expansion Slowdown Steep Inverted Flattish Low We are Here Economic Cycle Shape of the Yield Curve
- 4. Economic Cycle: Recovery Borrowing Costs Low Accommodative Surplus Moderate Monetary Policy Bank Liquidity Credit Growth Visual Proxy Risk: Reward Credit Spread Inflation Low Capacity Utilization Low Compressed Low When Economy is in Recovery Stage Interest Rates Will Creep Up Slowly. The Yield Curve will Steepen. long end short end 4
- 5. Recovery Phase: Post-Covid THE ECONOMY RECOMMENDED STRATEGY: ACTIVE DURATION MANAGEMENT INTEREST RATES 5 -6.60% 0.70% 2.50% 20.10% 30-Sep-20 31-Dec-21 31-Mar-21 30-Jun-21 Quarterly GDP Growth (YoY) 3.0 4.0 5.0 6.0 7.0 1 Year 2 Year 3 Year 5 Year 10 Year G-Sec Yield Curve as on 30 June 2021
- 6. Borrowing Costs Moderate Slow Tightening Neutral High Monetary Policy Bank Liquidity Credit Growth Visual Proxy Risk: Reward Credit Spread Inflation Rise in Capacity Utilization Moderate Widens High When Economy is in Expansion Stage Yield Curve will Flatten Slightly due to Rise in Short Term Rates. long end short end Economic Cycle: Expansion 6
- 7. Expansion Phase: 2005 – 08 Growth THE ECONOMY INTEREST RATES 7 7.9% 8.1% 7.7% 3.1% 7.9% 8.5% 2006 2007 2008 2009 2010 2011 Annual GDP Growth (YoY) 31 Dec ‘06 31 Dec ‘07 5 6 7 8 1 Year 2 Year 3 Year 5 Year 10 Year G-Sec Yield Curve RECOMMENDED STRATEGY: ACCRUALS + SHORT DURATION
- 8. Borrowing Costs High Tightening Deficit Moderate Monetary Policy Bank Liquidity Credit Growth Visual Proxy Risk: Reward Credit Spread Inflation Capacity Utilization Peaks High When Economy is in Late Stage Yield Curve will Invert due to Rate Hikes, Falling Long Term Yields. long end short end Economic Cycle: Late Stage 8 Initially Moderate; Later High
- 9. Late Phase: 2010-16 THE ECONOMY INTEREST RATES 9 7.90% 8.50% 5.20% 5.50% 6.40% 7.40% 8.00% 2010 2011 2012 2013 2014 2015 2016 Annual GDP Growth (YoY) 0 2 4 6 8 10 12 1 Year 2 Year 3 Year 5 Year 10 Year Inverted G-Sec Yield Curve on 1 Aug 2013 RECOMMENDED STRATEGY: LONG DURATION AFTER POLICYMAKERS CHANGE COURSE TO ADDRESS LATE STAGE MACRO PROBLEMS
- 10. Borrowing Costs Moderate Neutral Deficit Low Monetary Policy Bank Liquidity Credit Growth Visual Proxy Risk: Reward Credit Spread Inflation Capacity Utilization Falls High Compress Falls When Economy is in Slowdown Stage Yield Curve will Fall to its Lows as Rate Cuts are Announced Economic Cycle: Slowdown 10
- 11. Slowdown Phase: 2018 to 2020 THE ECONOMY INTEREST RATES 11 8.30% 6.80% 6.50% 3.70% -6.60% 2017 2018 2019 2020 2021 Annual GDP Growth (YoY) 3.0 4.0 5.0 6.0 7.0 8.0 1 Year 2 Year 3 Year 5 Year 10 Year G-Sec Yield Curve as on 31 May 2020 RECOMMENDED STRATEGY: LONG DURATION
- 13. Economic Cycle Visualized Through G-sec Yield Movements 13 5 6 7 8 9 10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Slowdown G-Sec Yield Movements (%) Short Cycles
- 14. Economic Cycle Visualized Through Earnings Growth 14 -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 GFC Crisis Sensex EPS Growth (YoY %)
- 15. 0% 5% 10% 15% 20% 25% 30% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Economic Cycle Visualized Through Credit Growth (YoY %) 15 Expansion Late Stage Credit Growth Weakens Slowdown Growth Slumps Short Cycles Bank Credit Growth (YoY %)
- 16. Present Situation WHAT DO ECONOMIC FORECASTS AND INDICATORS SAY ABOUT THE CURRENT ECONOMIC CYCLE? INDICATOR VALUE SIGNALS GDP Forecast for FY23 7.6% Expansion Inflation Forecast for FY23 6.7% Above Comfort Zone Capacity Utilization (Mar 2022) 74% At Long Term Average Credit Growth (Aug 2022) >15% YoY Above Recovery Levels G-Sec Yield Curve Change (Mar 31, 2022 to Sept 12, 2022) +197 bps (1Y); +36 bps (10Y) Moving from Steep to Flattish 16 The Economy remains on a strong footing. Yield curve position reflects that we are in the Middle of the Expansion Phase and there is still room left for interest rates to move up Source: RBI
- 17. • Trends in the Real Growth Domestic Product of the Economy indicates that we are currently in the expansion phase of the economic cycle. • As learnt so far, the expansion phase pushes up interest rates overall and credit spreads also widen. This opens up opportunities in accruals. It is a good time to invest in shorter duration papers. • Economic indicators like a strong PMI, rising inflation, rise in GST collections, withdrawal of surplus banking liquidity, are evidence of an expansionary phase. • The time taken to move from one phase to another depends upon evolving macros. Reasonably low inflation levels can prolong the expansion phase; whereas credit events, global cues or ‘Black Swan’ type events can accelerate the move to the next phase Summary 17 PMI: Purchasing Manager’s Index; GST: Goods & Services Tax
- 18. • Investment in Short Duration bonds is suitable in the current fixed income markets scenario. • We believe floating-rate bonds (FRBs) are suitable in a rising-rate environment and hence recommend investing in schemeswhichtake exposure to FRBs. • We recommend investing in accrual assets in a staggered manner to capture the trend of rising bond yields. Our Recommendations 18
- 19. Scheme Recommendations 19 FOR SCHEME NAME Short-Term Parking ICICI Prudential Ultra Short Term Fund ICICI Prudential Savings Fund ICICI Prudential Floating Interest Fund Medium-Term Accrual Investment ICICI Prudential Credit Risk Fund ICICI Prudential Medium Term Fund Mix of Accrual and Dynamic Duration ICICI Prudential All Seasons Bond Fund
- 20. Potential Risk Class Matrix 20 Disclaimer: As per SEBI Circular dated , June 07, 2021; the potential risk class (PRC) matrix basedon interest rate risk and credit risk ,is as above Sr No Scheme Name Position in the Matrix 1 ICICI Prudential Medium Term Bond Fund 2 ICICI Prudential All Seasons Bond Fund 3 ICICI Prudential Savings Fund 4 ICICI Prudential Floating Interest Fund 5 ICICI Prudential Ultra Short Term Fund 6 ICICI Prudential Credit Risk Fund
- 21. Riskometers 21 Please note thatthe Risk-o-meter(s) specifiedabove willbe evaluatedandupdatedon a monthly basis.The above riskometersare as on August31,2022. Please refertohttps://www.icicipruamc.com/news-and-updates/all-newsfor more details. Macaulay duration is the weightedaverage termto maturityofthe cash flows from a bond.The weight ofeach cash flowis determinedby dividingthe presentvalueofthe cash flowby the price
- 22. Mutual Fund Disclaimer 22 Mutual Fund investments are subject to market risks, read all scheme related documents carefully. All figures and other data given in this document are dated. The same may or may not be relevant at a future date. The AMC takes no responsibility of updating any data/information in this material from time to time. The information shall not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Prudential Asset Management Company Limited. Prospective investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribingto the units of ICICI Prudential Mutual Fund. Past Performance may or Disclaimer: In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Ltd. (the AMC) has used information that is publicly available, including Budget speech and information developed in-house. The stock(s)/sector(s) mentioned in this slide do not constitute any recommendation and ICICI Prudential Mutual Fund may or may not have any future position in this stock(s). Some of the material used in the document may have been obtained from mem- bers/persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. We have included statements / opinions / recommendations in this document, which contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such expressions, that are “forward looking statements”. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc. ICICI Prudential Asset Management Company Lim- ited (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. Further, the information contained herein shouldnot be construed as forecast or promise or investment advice. The recipient alone shallbe fully responsible/are liable for any decision taken on this material.