Your money is influenced primarily by two ‘I’s. One is inflation, and another is interest rates. The two are linked to each other and move in tandem. As inflation goes up, interest rates rise too. Your quest is to attempt to beat inflation every year with your investments. As most Indians continue to hold money in the bank and fixed deposits, the year 2022 would be tough to beat inflation. Whenever we have had a surge in inflation, gold prices have soared.
However, in 2022, gold prices have not moved anywhere. They have barely moved in over the past decade compared to the usual trend. Rising commodity prices and supply shocks drove the stubbornly high consumer price inflation. The war in Ukraine and COVID-19 restrictions in China have slowed global supply chains.
The inflationary trend is strange too
For the first time in history, we may have a full calendar year where consumer price inflation in America is higher than in India. It was a year when interest rates and inflation dominated conversations across financial markets. The strangeness does not end here. The US dollar gained strength against major currencies in the worst year for consumer inflation since 1981. The Indian rupee fell nearly 10% this year against the US dollar. However, it gained strength against the British pound, the Japanese Yen and the Euro.
Foreign portfolio investors are significant drivers of valuation across global financial markets. They pulled out money from everything that looked risky in light of rising interest rates. India was no exception. However, Indian equities showed resilience despite that. Retail investors continue to pour money into equity assets through systematic investing. That is providing a cushion against a sharp slide witnessed in other markets.
If you look at benchmark indices for their 2022 performance across segments, there seems to be an uneasy calm. The NSE Nifty, Nifty Midcap and the Nifty Next 50 have just about hung to levels where they were at the start of the year. That does not mean things have remained calm in the wonderland of investing.
The year saw the usual performers underperform. The Nasdaq 100 shed a third of its value so far in 2022. The Nifty IT index in India is down by a fifth. The new-age tech companies, including consumer and fintech, have had a rough ride in 2022. Most companies riding on India’s domestic consumption boom for food delivery, financial services on smartphones, e-commerce and logistics have witnessed a loss of investor confidence.
There have been pockets of outperformance. Public sector bank shares have improved on interest income and profit margins due to lower non-performing assets. The credit growth in the economy surged in 2022 to a level higher than the deposit growth witnessed for a couple of years to 2022. Telecom and capital goods companies saw share prices rally from the lows of the pandemic. However, most of that action could be termed a ‘catch-up’.
At the start of 2022, there was a lot of excitement about Bitcoins and other cryptocurrencies. It was touted to be the most disruptive development. Governments and regulators across nations stalled their march. They saw it as a direct challenge to their authority to issue currency. Many countries decided to launch their versions of digital currency. India’s Reserve Bank of India continued to oppose an accessible way for cryptocurrencies. The Indian government decided to tax transactions in the crypto assets or currencies heavily. The value of cryptocurrencies at the start of the year was over USD 2.3 trillion. It is now less than $900 bn, a free fall of two-thirds of the value. The collapse of FTX, a trading platform, exacerbated the slide recently.
The year taught us the importance of diversification. The idea of making fast money by investing in seemingly attractive assets is fraught with too many risks. It is an excellent idea to spread your investment across asset classes. This column can only recommend getting a professional financial advisor like every year.
Interest rates, inflation dominate conversations
For the first time in history, we may have a full calendar year where consumer price inflation in America is higher than in India. It was a year when interest rates and inflation dominated conversations across financial markets
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)