US recession, dollar bear market investors

Maneesh Dangi, Founder, Macro Mosaic Investing & Research, says “for local investors, this whole thing about international investing has been because here currency always depreciates. So, you do not have to do it. Just look for Indian carry, be it credit or Indian two-three-year bonds or if India also starts to cite some slowdown at some point in time, then Indian bonds, 5-10-year bonds. That is the way to sort of play this USD-INR. If you are a punter or speculator on USD-INR, maybe right into the recession you should go short dollar that is the way the punter or speculator trade would be.”

You are of the view that interest rates in the US have peaked out. You are of the view that one should now bet on the strength of the rupee. You also think that the best way to bet on asset allocation right now is to go for the credit market rather than bond market. Is that Maneesh Dangi, the bond guy, who is talking about the credit market or Maneesh Dangi, the asset allocator, who genuinely feels that it is time to go to bonds?

My general view of looking at things and how to go after a commonsensical approach, which is cheap. So, at various point in time, sometimes equity, sometimes bond, sometimes credit, sometimes dollar, sometimes the rupee. You try and move your pack of assets in a manner that your key objective is to do a little bit better than Nifty over long periods of time. So, there are only two approaches to outdo Nifty. One is to pick the right stocks and make a good portfolio. Another is to churn from one asset to another and extract a little bit extra risk premiums. I do the latter.


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And so, an asset allocator calling for credit risk is very, very juicy right now in India. Currency, of course, I am looking at after a very long time. I have been a rupee bear over the last 10 years. I have spoken against INR and for the dollar. But after the US recession, of course, I think we are entering perhaps five, 10 years of a bear market in the dollar.

So, for the timing, you ought to wait a bit for a US recession because the US dollar is a counter cyclical currency. But my sense is that five, 10 years would be great for INR. That continuous 3-4-5% depreciation would pause. It will not reverse, of course, given the inflation differential, but our currency will actually be rock solid for a very long time in the whole of the 2020s.

Rupee is at 82.50, almost 83. Do you see in the next three years, it could give a CAGR appreciation of 3-4%, it could be closer to 77, 78?

No, no. Think of it like this; basically, rupee has a combination; one is a rate at which it is transacting vis-à-vis dollar and then the currency and the bond yield level. Indian bonds, of course, are higher. So, if you are a currency trader, you would look at if the currency stays stable also at this level for five years, you would end up making 7% in the dollar versus what you are getting in let us say, four quarters in dollar in US treasury. So, when your currency does not depreciate, it effectively means that it becomes a charm for everyone else. It has become a carry asset for you, for everyone in the world.

So, for a very long time, Indian currency has been steadily depreciating, especially after 2008, for a good 15 years. I think we are entering in a setup in which, not to do with INR, but more to do with US dollar because it is exorbitantly expensive now, almost 30-35% on a PPP basis. So, as an Indian investor, we are always worried that even though the Nifty might do 15%, if my currency depreciates by 5-10%, my net returns in dollars are low. That is the point I have argued many times. Maybe after the US recession, we will enter a setup where INR assets, both bonds, credit as well as equities would actually look better than dollar assets.

If one is bullish on Indian rupee, in equities you can start a SIP, but in rupee you cannot do that. You can only buy it in futures. So, what is the best way to participate?

No, the best way to participate is Indian carry for an Indian investor. If I put out views on INR, it is because for the global investors that I talk to, I am actually cautioning them five-six months ahead that look there is going to be depreciation in Indian currency for next six months perhaps because of the US recession because as I said the US recession means counter cyclical strength of dollar will get reflected. So, Indian currency may still depreciate by 2-3%.

But I am sort of simply telling whichever investor I talk to abroad, that now it is time to rethink that the 2010s would not play out in the rest of 2020s, that our currency may not depreciate as steadily as it did for variety of reasons that it did, so that is for a global investor.

For local investors, this whole thing about international investing has been because here currency always depreciates. So, you do not have to do it. Just look for Indian carry, be it credit or Indian two-three-year bonds or if India also starts to cite some slowdown at some point in time, then Indian bonds, 5-10-year bonds. That is the way to sort of play this USD-INR. If you are a punter or speculator on USD-INR, maybe right into the recession you should go short dollar that is the way the punter or speculator trade would be.

Short dollar or long rupee? I mean, they both are pretty much the same sides of the same coin.

Yes.

We are happy that crude yields have come down from 5% to 4%. But this is more like a canary in a coal mine and a harbinger of a recession around the corner. It is more dangerous than what we think.

So, a US recession is bad news for US equities because there the EPS is not baked in an almost 10-12% increase in S&P and they will be surprised there. But this recession, will be a soft one which is more or less given, I have argued about it for last two-three months that it is not a bad news for India because the lot of macro unnecessary stress of strong dollar, strong crude would actually wither and that would actually be a good setup for local macro because just a small point here that Indian business cycle is at a different stage.

Indian business cycle, if at all we are in a little bit of a mid-cycle whereas US business cycle is pretty stretched. So, if it has a recession, India has a little bit of a dent on valuation, but from a pure economic standpoint it is not a very bad news for the economy.

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