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Lessons from history; time to unload

By First Capital Research

Previous Fixed Income Report – Increase exposure in mid-long tenor bonds
In line with our expectations with the easing of political uncertainty post-Presidential Election, coupled with a favourable macro environment, bond yields eased off towards our targeted bottom bands of the yield curve. The favourites that we recommended, 2023 and 2024 maturities, saw a sharp dip in yields, creating heavy capital gains.

Recent hefty tax cuts may lead to fiscal slippage: The recently announced hefty stimulus package may cause fiscal slippage, in light of the estimated loss to the Government revenue. Reduction in tax revenue and uncertainty in all other indicators (foreign reserves, inflation and exchange rate) may significantly deteriorate macroeconomic conditions and increase volatility of interest rates. Accordingly, we lower our First Capital Economic Health Score for the bond market for the next couple of quarters.
Reduce exposure in Trading Portfolio: The Bond market yield curve is currently trading at the lower bands of the First Capital Research yield curve expectations. In our Bond Portfolio, our current investment is assumed to have 50% exposure with 35% into trading portfolio and 15% in carrying portfolio. With the present macroeconomic environment, we recommend completely exiting the trading portfolio, considering the volatile environment, while maintaining exposure in the carrying portfolio. We recommend avoiding accumulation in the secondary market to bid for the auctions.

Portfolio Recommendation:

Reduce overall portfolio to 15% from 50%, cut Trading Portfolio to 0% from 35%, and maintain Carrying Portfolio at 15%.