Sandeep Bagla, the CEO at TRUST Mutual Fund, stated in an interview with Moneycontrol that there is a high probability of 2024 being a volatile year. He advises investors to moderate their return expectations but remain invested in a disciplined manner. According to him, several risks are building up in the global economy, including geopolitical risks that could potentially lead to a disruption in the global supply chain.

Sandeep, who has over 25 years of experience in financial markets, warns that there is a significant risk of Central Bankers reducing their balance sheets beyond a tipping point, which could cause an abrupt halt in the asset price rally. It is essential to stay cautious and vigilant in such an unpredictable economic environment.

Do you think, globally, premature interest rate cuts may be a mistake by central bankers?

An ideal monetary policy should be counter cyclical so as to reduce the volatility in output and employment, which are caused by the normal ebb and flow in business cycles. Interest rates should be raised when the economy is growing above trend and monetary conditions should be eased at times when there are signs of an economic slowdown. However, there are significant delays in recognizing the turning points in the economy and taking suitable actions, which lead to central bank measures exaggerating the trend rather than moderating it.

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In the past cycles, there have been occasions when central bankers have conducted premature rate cuts and inflation has risen again after some time. With so much excess liquidity still sloshing around in the global markets, the dangers of inflation need to be carefully considered before embarking on a rate-cutting cycle.

Will the inflation be only major risk factor to watch out for in 2024?

Multiple risks are building up in the global economy. The geopolitical risks are piling up and they could lead to a potential disruption in global supply chain. There is a great risk that the Central Bankers reduce their balance sheets beyond a tipping point which could result in an abrupt halt in the asset price rally.

Inflation also remains a formidable risk as there seems to be continued growth in loan induced consumption, a potential rising wage price spiral, and tightness in global labour markets.

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Where do you see value while considering themes for investment in the new year?

There appears to be value in large-cap stocks in relative terms when compared to small and mid-cap stocks in India. The long-term bond funds appear to be attractive in India as corporate spreads have increased significantly. Investments in longer-term fixed-income funds could generate capital gains, thereby enhancing investor returns, if inflation remains under control and a global interest rate-cutting cycle starts.

Bond funds offer safer investment options which are likely to deliver inflation-beating returns due to high interest income and the possibility of rate-induced capital gains for investors.

Any sectors that you are least interested in for investment?

In some of the small and mid-caps, the valuation appears frothy as the markets seem to have discounted the best possible scenarios for the companies and there is little margin of safety for investors.

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Investors could avoid sectors which have seen a rapid rise in the recent past.

Do you think 2024 will be a volatile year for the markets and investors should not expect 15-20 percent kind of returns on the benchmarks front?

There is a good chance that 2024 could be a volatile year. The spectacular equity returns in 2023 were preceded by a lacklustre, low single-digit return in 2022. Investors should moderate their return expectations but remain invested in a disciplined way.

Do you expect government spending to increase in the current quarter, especially run-up to the general elections?

A large part of the government spending has already been front-loaded in the current financial year. One could see a pick up in the spending of departments which have lagged so far.

What could be one factor that can derail or put the market significantly on the back foot?

There could be bouts of profit taking which could keep markets in check. I see a reduction in global liquidity as the major risk for asset prices.

Do you have major expectations from the interim budget which is likely to be presented on February 1?

Increasingly, the budget announcements have become a statement of accounts of the central government, as they should be. The Government appears to be announcing major policy changes as and when they are required and not waiting for the Budget to announce them all together in a bunched manner.

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