bonds to beat inflation and protect the capital. While investing in fixed-income instruments, avoid corporate bonds, especially high-yield bonds and mortgaged-backed bonds, as these have higher default rates.
Invest in tangible assets: During economic stress, one can consider investing in a tangible asset, which is likely to be unaffected by a drop in the purchasing power of the rupee. In the current market, investors that have good credit scoring, plenty of cash and less debt might be able to pick up properties at a distress price.
Avail opportunities: According to Jim Cramer, former US-based hedge fund manager, “there is always a bull market somewhere”.
No matter how bad the economy is, no matter how terrible the job market is, or how high the cost of debt is, there is always some pocket of the market where it is incredibly easy to make money because of circumstances that have converged. For instance, during economic stress, some companies may experience falling share prices while earnings-per-share hits the roof with a strong balance sheet without any logical reasoning. Investors should avail such opportunities offered by the markets.
Although a lot is made out of a country being in economic stress, it is not the end of the world. If investors conduct their affairs conservatively, do not depend entirely on their jobs and have cash in hand while boasting of little or no debt, they are going to be fine. Similarly, those who own business and focus on keeping costs low, have sufficiently high margins and reduce spending, are probably going to come out ahead of the game. Economic stress just means that the overall economy is shrinking; it does not mean that you can’t increase your income.
The writer is associate professor in accounting and finance at IIM Shillong