Searching for the Certainty Premium! | The Beam: Weekly Market Narrative

Over the past two weeks, the global macro environment has not only become volatile, it has also become uncertain.  Volatility is a measurable condition: prices move widely, but the range of outcomes is broadly understood and can be sized, hedged and priced. Uncertainty is different as it is opaque and far more difficult to navigate than volatility.  The current environment is challenging because it goes beyond the weakness in any single asset class. The most vexatious issue for investors is the fact that the usual portfolio diversifiers are not providing the protection or returns expected of them. 

Oil, Rates, France, AI: All at Once  - Why has the global macro environment turned so uncertain

A combination of factors occurring simultaneously has made the global macro environment uncertain and in the immediate term, we confess we do not know the direction for Equities, Debt and gold, attractive valuations and a robust investment thesis, notwithstanding.  Brent crude has moved conclusively above $100 a barrel – despite reports of more oil coming out of the Strait of Hormuz.  With reports of renewed strikes on Iran being planned, no one can say whether it settles or spikes. The ‘sustained’ rise in oil has fed the question of whether the Fed’s next move is a pause or another hike, which has kept the US 10-year yield near 5% and moving by 10 to 15 basis points in a single week, until the recent decline led by a sell off in the Nasdaq.  French ten-year yields have moved higher than 5%, the highest since 2008, in what is on track to be the sharpest quarterly rise in nearly four decades. The spread of French ten year  over German Bunds has widened to more than 150 basis points this month, a level not seen since the euro-area sovereign debt crisis.  US Equity markets have also become volatile and uncertain with investors asking how the enormous investment in artificial intelligence will be monetised. The semiconductor index fell by more than 11% in a single week, its longest losing streak since 2008, and Meta fell nearly 7% on the day after reporting a strong quarter, because investors have started to question what the spending will return. 

Very Positive on Indian Equities, but difficult to take a call on the near-term market direction

We remain very positive on Indian equities, and the reasons are a rare alignment between valuations and earnings.   Valuations have turned attractive: the Nifty now trades at a PEG ratio of about one, the lowest in many years.   At the same time, corporate earnings are moving onto a durable double-digit path, supported by an economy heading towards nominal GDP growth of around 12%.  It is rare for price and fundamentals to improve together, and this is the basis for our structurally positive view. However, we are unable to give a direction for Indian equities in the near term. The reason is not doubt about India but the simultaneous and shifting interplay of three global forces that we do not have certainty on: the path of oil, particularly at current prices, which affects India’s current account, the rupee and inflation; the question of how the heavy investment in artificial intelligence will be monetised, which is driving global equity sentiment and foreign flows; and the strain in eurozone sovereign debt, which bears on global risk appetite and the cost of capital.  The Fed window on rates is also wide open with inflation concerns abounding and fear of global food prices entrenching inflation.   The near-term direction on markets will be driven by these factors, attractive valuations and earnings notwithstanding.   Our conviction rests on India delivering double digit earnings growth (barring any global crisis) but the near-term path is a separate question.

Gold Has a strong Case but in near term may be held back by the Fed

Even gold, which has been seen as a diversifier and the asset to hold when global macro anxiety rises, remains rangebound. Gold tends to do best when investors fear for growth or for the safety of the financial system, because those fears push real interest rates down and make an asset that pays nothing look attractive. The present anxiety is of a different kind. It is driven by oil, by the risk of inflation returning, and by the possibility that the Fed will hold rates high or raise them further, which keeps real yields positive.  As we argued above on equities, we remain structurally positive on gold, but in the current environment we cannot take a tactical call until we have more clarity on the Fed, or until we see systemic risks in global macro, which is not our base case at present. 

What should an investor do in existing era of uncertainty and lack of direction in key asset classes

Currently Investors cannot say with any confidence where oil will settle, what the Fed will do with its open window on rates, how sticky will inflation be  or how the spending on artificial intelligence will eventually be monetized and whether the spread between German and French bonds will widen further.   In that setting, certainly has become the hardest thing to find.   Uncertainty is the only certainty, currently. 

Unfortunately, we live in a global world and the global uncertainties are impacting India too.  The economy is resilient and earnings are growing, yet equity markets continue to sell off.  Over the past two weeks, boiling oil and the US equities sell-off has seen a sharp drawdown in Indian small caps and mid-caps. 

Alternatives can be a conscious allocation alongside other assets Where Certainty Is Scarce

Alternatives emerge as an attractive choice in the ongoing environment of uncertainty, where we are unable to take a near-term call on yield and returns.  In each case – domestic equities, global equities, fixed income and gold - the return is set by a judgement about the future that we cannot make with confidence, at least for now.   

India now has a wide offering of investment vehicles dedicated to Commercial/Residential Real Estate, Private Credit and Private InvITs, where bulk of the returns are generated through contracted interest payments, toll charges or rental income, with some enhancement from structuring or leverage. While not entirely risk-free, these funds provide a degree of capital protection through a combination of tools, like a charge on assets, control over receivables and borrower guarantees. More importantly, many of these funds offer regular coupons and a certain predictability of cash flows.

Private credit merits attention, as returns are primarily driven by interest payments from borrowers, rather than by changes in market valuations or the direction of benchmark yields. For investors, this creates the opportunity to earn a contracted income stream, often at a premium to comparable public-market debt, in exchange for taking on illiquidity and borrower-specific risk.

A well-structured loan also has clear maturity, regular cash coupons that can flow through to investors, often quarterly, covenants that flag trouble early and, in the best structures, a first claim on assets if things go wrong. That is where the visibility comes from, though visibility is not a guarantee: credit quality, manager selection and the lock-in all matter.

The allocation must of course, be sized around the investor's liquidity needs, risk tolerance and investment horizon, recognizing that capital may be locked. The broader point we are trying to make is that when traditional assets are struggling to deliver satisfactory returns, the answer is not necessarily to take more equity risk or extend duration indiscriminately. It may instead be to allocate a measured portion of capital to well-underwritten alternative strategies, where the return is earned through allocation discipline rather than dependence on a favourable market multiple or a timely call on interest rates.

In uncertain times, what is contractual tends to be worth more than what is hoped for.

Disclaimer: Lighthouse Canton Pte Ltd. (“LCPL”) is incorporated in the Republic of Singapore (Registration No: 201422117K) and regulated by the Monetary Authority of Singapore (Capital Markets Services Licence No. CMS100443). Lighthouse Canton Capital (DIFC) Pte Ltd (“LCC”) is incorporated in Dubai International Financial Centre (Licence No. CL 2614) and regulated by Dubai Financial Services Authority (Category 3C Licence No. F004068). The financial products offered by LCPL and LCC are only available to Accredited Investors and Institutional Investors as defined by MAS and Professional Investors as defined by DFSA. The information in this electronic transmission does not constitute an offer, or intention by, or on behalf of LCPL and/or LCC, to subscribe, purchase or sell any financial products and/or services. LCPL and LCC accept no liability for any loss arising from the use of any information contained herein. The contents of this email are confidential and meant for the intended recipient only.