As we slowly settle into the post-pandemic era, one of the hallmarks of this period has been higher inflation than we have seen in the recent past. In response to rising inflation, central banks across the world have responded with a fierce interest rate hiking excursion.

As a consequence, neither of the asset classes–stocks, or bonds, have performed well recently. It raises an essential question: how should we look at allocating our savings?

That’s precisely what Deepak and Shray are here to talk about, among intriguing followup questions one may have when it comes to Investing in a world with high interest rates, including which pockets to consider in financial and real assets. Listen in.

Timestamps and highlights

01:30 — To an average investor, is debt coming back as a relevant asset class?

“If you have multiple periods of high and low interest rates, you might actually get very good returns on certain corporate, or even government bonds.”

“[…] It’s coming to a point where debt might actually start to become an interesting investment, simply because interest rates across the world have gone up. This is not the time to look backward, but to look forward and say going forward, returns might actually be quite good from here.”

09:40 — Looking forward, how should one look at asset allocation? And, when is the right time to look at the debt markets?

“You might actually want to position yourself at the outer end of the spectrum in government bonds when the RBI switches its stance. But, until then, I think it’s a waste of time because you may see interest rates go up substantially. And we don’t even know how long they’ll go up.”

“Debt is a very boring instrument. What happens in equity markets in ten days, happens in six months in the bond market. It happens slowly over time, it’s excruciatingly painful, and people rejoice over 1% returns. […] But, I think the value in looking at a bond market as an equity-esque investment, only happens when interest rates start to come down.”

25:09 — Will high interest rates emanate an opportunity in gold?

“It is not inflation that drives gold prices, it’s the fear of inflation that drives it.”

26:49 — What about opportunities in equity markets?

“If in a low interest rate environment, the biggest beneficiaries happen to be zero debt service companies, then from an intuitive perspective, the beneficiaries in a high interest rate environment are companies with very high levels of debt, but whose competitors need the same levels of debt, but can’t acquire it because they don’t have the same standing in debt markets.”

40:03 — Are there repercussions on the startup ecosystem?

“The unfortunate problem of startups is that they come from the concept of needing capital to burn.”

50:05 — How long do interest rate regimes last?

“We have had a very long period of very low rates. Can that mean that we will have a longer period of high rates? The answer will come from how much damage there will be to the economy before the central banks blink.”

52:10 — How would we know when there's a pivot?

“Interest rate cycles don’t change overnight, they take a long time. Watching an interest rate cycle change is like watching paint dry. Six to eight months, something will happen, and suddenly the cycle would have changed.”

57:30 — What makes Deepak optimistic about investing in the current landscape?

“If you don’t deploy in an uncertain world, when do you deploy?”

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