Jamie Dimon, chairman of JP Morgan, one of the biggest banks in the world, has asked investors to prepare for an economic hurricane. He expects US Federal Reserve to stop bond purchases faster and keep interest rates high to tackle inflation and oil prices to flare up due to the conflict in Ukraine. The storm is likely to lead to a slowdown in global growth significantly. The World Bank and the Organisation for Economic Co-operation and Development, a club of rich countries, have already lowered global growth targets for 2022. Despite a higher growth projected than any other major country, India is unlikely to escape the economic hurricane.
All of that means you need to err on caution and avoid unnecessary risks.
The enemy of your money
Inflation in an economy is the biggest enemy of your finances. The value of money erodes as persistently high inflation increases the cost of living. Your monthly expenditure will likely go up as consumer price inflation will remain high. The RBI Household Inflation Expectation Survey released last week says that inflation is expected to remain high for the following year. Industry associations and stock market analysts predict persistently high inflation but expect it to cool off over the next 12 months. That follows a sharp hike of 0.9% in repo rates in a month and an increase in the cash reserve ratio by 0.5% by the RBI monetary policy committee.
The CPI rate for May 2022 will be released early next week. It is expected to ease but remains higher than the upper limit set by the RBI of 6%. The market expects RBI to continue to hike rates to tame inflation. The indicator of rising interest rates is the government’s 10-year bond yield in the market. It hit 7.5%, the highest level in three years. That means interest rates are expected to increase over the next 12 months. A conservative approach would be to increase the cash savings and cut the associated risk.
Stock market investment
Retail investors like you jumped into the stock market over the past three years at the fastest pace. A slew of the new-age fintech firms sprang up and expanded the ambit of stock market investing and trading. However, the activity has dropped lately, and the new investor brigade has pressed the pause ‘button’. The average monthly trading volume for May 2022 regarding the number of shares on the National Stock Exchange fell to the lowest level since October 2020. That may not be such a bad thing. Many new investors entered markets without understanding the fundamental and technical factors that drive share prices. However, many of you continue to invest in equity assets through mutual funds and exchange-traded funds. The Association of Mutual Funds in India reported a solid net inflow of funds for May 2022 in equity or equity-linked assets.
That is the right way to deal with the situation. Despite a cut in the expected growth rate, India is likely to remain the fastest-growing major economy in the world. Companies that rely on the economy for growth tend to do well. So, if India’s GDP is likely to grow at 7.5% (according to the World Bank’s estimates), top-rung companies that depend on that tend to increase profits by at least twice that rate. Market leaders in sectors can pass on the rising input costs to customers and maintain their profit growth. You need to stay invested and continue with your regular monthly investments in equity assets despite the fall in prices.
If the war in Ukraine persists, the world will likely face a severe food shortage. Ukraine and Russia are prominent suppliers of wheat, edible oils, fertilisers and other essential food ingredients. It is in the interest of your money that there should be peace. The war broke out just when the world was trying to recover from supply chain issues. However, that may continue to push prices up further. Idle money loses value the fastest during a phase of inflation. You need to put it in government bonds or instruments that offer returns higher than a saving bank deposit.