CIO Speak: End of rate stasis, what’s next?

In the immediate aftermath of the COVID-19 pandemic, inflation became one of the biggest reasons of concern for global economies. This led to an environment of increasing rates, despite rate hikes threatening the prospects of global growth. Today, by and large, the hike cycle has paused but the new rate regime is yet to commence. Interestingly, we have all experienced this rodeo before and watched rate cycles come and go. However, as we emerge from a period of rate stasis, it would be interesting to examine how a change in rate regime, specifically from a hawkish one to a dovish one, can impact market sentiment and performance.

Highlights

• The general sentiment in the stasis period is negative due to tepid economic growth. Thus, when rates are cut, markets tend to react negatively as the rate cut acts as an endorsement of economic slowdown and underscores the need to rev up the economy.
• In the 18 months following the initial quarter of correction (post the 1st rate cut), the benchmark Nifty generated returns in the range of 18-40%, 4 out of 5 times.
• Across the regimes analysed, the banking, financial services, and auto sectors generated positive returns 18 months post a change in regime to lower interest rates.
• Relative to equities, gold has outperformed the asset class in 3 out of 5 cycles, generating an average alpha of ~14% (3 cycles), in the 18 months following a change in regime.