Worst Asia Stocks Better Buy Than Best Bonds for Julius Baer

  • India’s NSE Nifty 50 Index has dropped most in Asia this month
  • Long-term potential for stocks is higher than bonds: Wurgler

Bank Julius Baer & Co. says India’s bonds are overpriced after they skirted a global rout this month and the nation’s underperforming stocks are more attractive.

“Indian bonds are expensive and they are not risk free,” said Diego Wurgler, head of advisory solutions for the Middle East at the lender’s $327 billion wealth-management arm. “It’s better to buy good quality stocks with high dividend yield than bonds,” he said, adding that “the long-term potential for stocks is higher than bonds’ return potential.”

Prime Minister Narendra Modi’s shock withdrawal this month of 86 percent of India’s currency in circulation has hurt equities, while boosting demand for bonds as banks plow some of the 5.12 trillion rupees ($75 billion) of fresh deposits into sovereign paper. Wurgler predicts stocks will do better going forward as the economy benefits from low crude oil prices, contained inflation and reforms like the goods and services tax. Bonds don’t yield enough in U.S. dollar terms to balance off the risk of buying them, he said.

The NSE Nifty 50 Index has skid 8 percent so far this month, the worst performance in Asia, while Indian government securities are the region’s biggest gainers. The benchmark 10-year yield has slipped 48 basis points since end-October, including 12 basis points on Monday, to 6.31 percent, its lowest close since May 2009.

CHART 1: Foreign investors have sold Indian stocks and bonds this month as concern about the cash ban has been compounded by increased confidence that the U.S. will raise interest rates in December. Julius Baer has a seven percent allocation to emerging-market bonds, though it may reduce this going forward, said Wurgler, who indicated it made sense to shift from emerging to developed market government and corporate debt.

Outflows from local assets have weighed on India’s currency, which has weakened 2 percent in November to head for its worst month since January. It dropped to the lowest level since March 1 in Mumbai on Monday.

CHART 2: Only seven stocks have climbed this month in the Nifty 50 index as most sectors were hammered by concern about reduced consumption following the cash ban. Modi’s move has disrupted the nation’s informal sector, which employs more than 90 percent of workers. Deutsche Bank AG predicts weak consumption could shave off 50 basis points from growth in the October-December quarter.

In addition, local equities were hurt as investors retreated from emerging markets after the surprise victory of Donald Trump in the U.S. elections.

“Trump coming is not good news for emerging markets in general,” Wurgler said. “In these volatile times, we will not take additional risk in our bond portfolio as we have some risk with exposure to equities.”

CHART 3: Indian sovereign bonds have bucked this month’s drop in Asian securities. Julius Baer is being “extremely selective in bonds and will prefer high-quality debt assets,” Wurgler said. “We will work on duration of bonds, reducing the duration of our investments,” he said referring to cutting longer-maturity paper that carries more interest-rate risk.

— With assistance by Sandy Hendry

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