There is panic across financial markets. Amidst the holiday season, anxiety levels are rising among businesses. The latest variant of the Covid-19 virus, Omicron, is spreading fast and forcing local administrations in cities and states to introduce lockdowns again. The number of new Covid-19 infections are surging in the US and Europe. In India, states like Maharashtra and Delhi are witnessing a rising number of new cases.
There is a rise in the consumer price inflation rate on the one hand. On the other hand, concerns over future economic growth are growing. Stock markets have reacted immediately, by falling 10-12% off the peak value. The so-called intelligent investors are pulling money out of risky assets and would like to wait and watch.
What to watch out
There is no significant change for someone who is a saver and likes to put money into fixed income instruments like fixed deposits or government-sponsored public deposit schemes. Interest rates will hold firm but are unlikely to change significantly on your fixed deposits. The Reserve Bank of India is unlikely to make any meaningful changes in borrowing rates for banks. That effectively means your savings would generate the same return as the year gone by.
The worry for you is inflation. The return offered by fixed deposits would barely cover your inflation. Retail inflation is the highest in six months. However, the rapid spread of Omicorn means concerns over economic growth would prevail. There is a minor improvement in the credit to the industry, but the demand is not that high to impact interest rates. The government has also curbed borrowing this year. As such, there is no pressure on interest rates to go up. The RBI’s monetary policy committee is watching the inflation like a hawk but continues to adopt an ‘accommodative’ stance on growth.
All that means the value of money could erode faster due to inflation, and your fixed income return would remain the same as last year.
If you are a regular investor in a systematic investment plan of equity mutual funds, you need not make significant changes to your strategy. The month-on-month data shows that investors are taking a liking for index funds. They mirror the returns given by benchmark indices like the Sensex or Nifty or other broader indices. That is an excellent addition to your portfolio of schemes.
Equity mutual funds and index funds offer market-linked returns. Most analysts are bullish about equity markets in the year ahead despite high inflation. When investing in mutual funds, you are essentially putting your savings to work for your long-term financial goals. There is no need to churn them just because the market has short-term volatility.
If you are a direct investor in the stock market and have started trading and investing this year, you need to tread cautiously. The market is volatile, which is likely to continue in the short term. Foreign portfolio investors are virtually absent from the market due to holidays overseas.
Many gains in the Indian equity markets see active foreign investor participation. You may see lower trading volume and sharper price movements, with this category almost absent. Any reaction in the market to the rising number of Covid-19 cases in Mumbai and the National Capital Region could be sharper than usual. It may not be a good time to time the market unless share prices fall sharply. Today’s prices are a function of tomorrow’s profits. You need to look for signals that can affect the future growth of businesses. There are signs of improvement in the economic activity in November 2021.
In many months, the purchase manager index or PMI composite index is at the highest level. That indicates businesses in the manufacturing and services sectors would spend more money procuring supplies. Any growth in that number is usually considered an expansion of the economic activity.
The only worry, for now, is that you may face a situation where local governments enforce lockdowns. If people go back to working from home, stop going out, we may have a few more months of slow economic activity. For the short term, brace yourself for volatility in the stock market.
(The author is editor-in-chief at www.moneyminute.in)