President Trump is fighting his war in the Middle East against Iran today. The purposes of his war are not immediately clear to the general public, nor the roadmap for concluding the same. The uncertainty has thrown the global financial system into turmoil.
However, while President Trump may not be certain how to end his war, we can be sure on how to guide our investments during these difficult times.
“During periods of geopolitical uncertainty, having a portion of high-quality credit instruments helps to act as a stabilising component in portfolios, as these investments are low volatile and provide liquidity & stability in the portfolio,” explains Amitabh Lara, Executive Director, Anand Rathi Wealth Limited about how having high quality credit in your investment portfolio can help you in tiding over the current war crisis in the Middle East.
For high-quality debt exposure, investors can consider instruments such as Government Securities (G-Secs) and AAA-rated bonds, which carry low default risk and are backed either by the sovereign or by financially strong issuers. These instruments tend to perform relatively better during uncertain periods as their returns are low co-relative to market sentiment.
“High quality credit typically acts as a stabiliser during periods of geopolitical stress,” says Tushar Sharma, Co-Founder, Bondbay. Instruments such as government securities and AAA rated corporate bonds are backed either by sovereign strength or strong balance sheets, which reduces the probability of default and limits volatility compared to lower rated instruments.
In uncertain environments, investors tend to move up the credit curve rather than down it. This means preference shifts towards issuers such as public sector undertakings, large financial institutions, and well capitalised corporates.
“These instruments may not offer the highest yields, but they provide predictability of cash flows and relative price stability,” says Sharma. Examples of such investments include government securities, treasury bills, AAA rated PSU bonds, and high quality target maturity funds that track sovereign or PSU indices.
Impact of market volatility
Also, do remember that when you are investing in bonds, your entire investment outlook must be different as compared to when you are investing in equities.
“In bonds, the credit profile matters more than the sector,” says Vineet Agrawal, co-founder of Jiraaf. Unlike equities, where sector narratives drive returns, bond investments are centred on repayment ability and credit ratings.
Bonds as an asset class are not impacted by market volatility in the same way as equities, because they offer fixed returns and regular payouts. That is why investors need not chase issuances from a specific sector. Investment-grade bonds across sectors can serve the purpose well, provided the issuer carries a strong credit profile.
“For investors, it’s suggested to look into government-backed debt instruments such as G-Secs, PSU bonds, and gilt funds,” says Lara. Gilt funds are a type of debt MF that invest in GSECs and other government securities. Experts bat for these investment categories as such instruments remain relatively stable across different market cycles and come with lower credit risk.
Sovereign backing
Do remember that government securities are backed by the sovereign, which adds a layer of security and public sector undertakings usually backed with solid balance sheets and better liquidity access, which helps keep things steady even when times get tough.
If one is looking towards sector-specific investments, they can consider Banking and PSU debt funds. These funds primarily invest in bonds issued by banks, public sector companies, and government-backed entities. The issuers here typically have stronger balance sheets, which is a good thing as it helps them sustain stable credit quality, even when markets were uncertain.
However, retail investors may face challenges while investing directly and tracking individual bonds as several aspects of investing in bonds that need to be monitored regularly like credit quality, maturity profile and interest rate movement.
“Instead Investors can consider investing in high quality debt mutual funds,” says Lara. For the long-term debt portfolio can be allocated to Gilt funds, Target Maturity funds. On the other hand, for short-term debt portfolios we have categories like Liquid funds, Money Market funds and Ultra Short Duration funds.
Still, we asked experts to spell out how the current crisis will affect bonds? Which are the sectors that will gain? And which will lose out?
“Defence linked issuers may see stable or even improved cash flows due to increased government spending,” says Sharma. Pharma and healthcare tend to be less cyclical and continue to have steady demand regardless of external shocks.
Utilities and energy transmission companies also remain relatively stable due to regulated revenue models.
On the other hand, sectors directly exposed to global trade, discretionary consumption, or high leverage may face pressure in such periods.
“The key is not sector selection alone, but the underlying credit quality within these sectors,” guides Sharma.
