Enjoy the ride, but switch horses – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/enjoy-the-ride-but-switch-horses/articleshow/86491276.cmsSynopsis

Retail investors should diversify to other asset classes. Saving is not a one-horse play.

The big difference between stock markets and fairy tales is that, in the latter, people live happily ever after. Markets have the habit of declining, after a dizzy bout of climbing. While the Sensex crossing 60,000 is a matter of joy for most people, including those who are neither investors nor have even an indirect exposure to the market, it also embodies a certain amount of risk, which it would be foolhardy to disregard.

The Indian economy is on the mend. The Covid situation, too, is improving, countrywide numbers of new infections per the average person infected coming down below one, and vaccination progressing impressively. Pent-up demand should, when unleashed, lead on to aggressive fresh investment, leading to further growth. Then there is the government’s promise to step up its investment, which must, at some point, make the transition from future promise to current action. So, stock prices do have a sound reason to go up. However, this is not the entire story. It is the global surge of liquidity from major central banks’ ultra-liberal monetary policy that sloshes around the world’s capital markets and lifts all stock prices. That liquidity will disappear, sooner or later. The US Fed has announced that it is likely to resume cutting back on asset purchases later this year itself, and wind down that operation by the middle of next year. The European Central Bank (ECB) has already begun paring its purchases of bonds. The European Banking Authority (EBA) buys a larger share of European bonds than the US Fed does of American bonds. The lower demand for bonds has already pushed up yields in Europe, although still to ultra-low levels. But the direction of change is clear. The RBI, too, is busy trying to mop up the excess liquidity it has created to support economic recovery, introducing new reverse repo operations.

While India’s economic prospects remain bright and stock valuations over a 10-year horizon would only be higher, it makes sense to prepare for short-term bumps. Retail investors should diversify to other asset classes. Saving is not a one-horse play.

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