It was supposed to be a year of a V-shaped recovery. Yes, stock markets are witnessing a surge in prices. However, the pace of recovery is slower than anticipated in 2020. The demand for goods and services is good but still just about near the pre-pandemic levels. As a result, businesses have yet to announce any significant expansion plans. That is slowing the pace of economic recovery.
The Reserve Bank of India is reading the data points like a hawk. The monetary policy committee, which meets once in two months, could tighten the easy money policy in December 2021. A primary reason is a stubborn inflation in the economy, led by rising fuel and food prices. The prolonged period of economic recovery is hurting the committee’s ability to rein in inflation. They have to keep the policy stance ‘accommodative’ and have not changed key borrowing rates since October 2020.
The state of your finances
If you are a regular investor in the equity markets, you are better off than most people in India. Despite a renewed interest in equity markets, only 6% of the households in India are taking any equity exposure. If you invested in index funds or exchange-traded funds, you have managed a return of 38% to 40% for your Nifty or Sensex funds. Actively managed diversified equity funds have done better, and sectoral funds like those linked to the NSE Metal index produced excellent returns in 12 months.
Your investment in gold has generated a negative return as gold prices are lower by almost 5% over last year. Interest rates on your fixed deposits or other savings schemes have stayed the same or trended down. The Reserve Bank of India has left repo rates unchanged over the past year.
New investors
A lot of you have opened demat accounts. The year 2020 was an eye-opener for equity investing. Being locked at home meant trying something new for many of you. With over 7.5 crore demat accounts, investors are jumping swiftly from not investing at all to even dabbling in cryptocurrencies or other related assets.
While the number of people having a demat account nearly doubled over the past year, the number of people having a mutual fund portfolio grew by merely 10-15%. That is a trend that should worry us. The rush towards crypto assets shows the lack of confidence in the traditional financial system. Equity assets are growing steadily, generating a return that is beating the prevailing inflation rate adequately over the long term. As an investor, you need to review your portfolio regularly. Rushing into something just because someone else has made money is a bad idea. Your investments have to align with your financial goals.
The road ahead
The slow pace of recovery means equity markets may not give the same returns as they did over the past twelve months. Institutional investors would closely watch the financial performance of major Indian companies over the next few quarters. They would then review their expectations early in 2022. That would determine the direction for the markets.
Till then, do not expect any runaway rally in equity markets. If you are directly buying equities, you need to continue regular investing instead of investing in a lump sum. Share prices are trading at a record high, and they take into account the economic recovery and profits that the companies would make a year later. Interest rates on your fixed deposits or loans are likely to remain around the current levels even if the RBI makes a minor upward revision in the repo rates. The inflation rate is rising, but it is not likely to go out of hand if one believes the RBI’s analysis.
The other factor of concern could be the behaviour of the new investors making a foray into the market. They have entered at a time when share prices are surging. However, their behaviour when the tide turns could be interesting to watch. Any panic selloff in the stock market could bring in price volatility. If you are one of those investors who has recently joined the party, you need to be aware that share prices go down as sharply as they go up.
(The author is editor-in-chief at www.moneyminute.in)