Investing is fraught with risks. Rising interest rates affect your investments in equity assets a lot. Global interest rates continue to be on the rise. The stubbornly high inflation in the rich world pushes up bond yields in America and many other developed economies. The sharp selloff in the US markets was due to a spike in 10-year bond yields. They rose to a 16-year high. That shows the risk the markets see in the US economy amidst political disagreements in the US Congress. International credit rating agencies have already warned about reviewing the US credit rating.
In India, interest rates are firm. The Reserve Bank of India’s monetary policy committee kept policy rates unchanged. The outlook for the consumer price inflation (CPI) was also left unchanged. There are signs of inflationary pressure due to an erratic monsoon. High-interest rates are likely to persist as long as there is an inflation threat. Some media reports suggest that the RBI could continue holding on to rates until the first quarter of 2024-25. Persistently high-interest rates stall the ability of businesses to borrow for expansion. However, companies with sound credit profiles tend to do better than others. That means they have steady cash flows and a strong balance sheet.
An analysis of the credit ratings of corporates shows no significant worrying signals. “Corporate credit profile performance stayed its expected course in 1HFY24,” said India Ratings, an affiliate of FITCH, a global ratings agency, in a release.” While upgrades continued to outpace downgrades, their intensity has moderated in line with the expectations. Downgrades on the other hand have only marginally moved up,” the release added.
That means the intensity of credit rating upgrades slowed but is still higher than downgrades. When credit ratings are upgraded for businesses, those companies are in a better position to borrow. The India Ratings release also highlights another key aspect. Mid-sized companies are showing a strong trend of credit rating upgrades. That is good news for the banking sector and small and medium businesses. The rally in small and mid-cap stocks in 2023 was driven by improving the fundamentals of these companies. If they continue to do so, it could gather more steam in 2023-24 too.
Among sectors that have witnessed credit ratings upgrade include infrastructure, capital goods, automobile and components, realty sector and consumer services. A lot of hope is pinned on the government spending on infrastructure to drive business growth in most sectors. The government is committed to spending money on infrastructure in the remaining fiscal year 2023-24. However, in an election year after that, decisions could see delays if there is a change of government. For the moment, stock markets are not worried about that aspect. Interest rate trajectory is a significant concern.
You may want to assess corporate fundamentals and choose companies with a strong portfolio balance sheet. Large companies that are sector leaders are a simple choice. You may also use help from technology to identify stocks and build a basket.
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