According to Bose, the current liquidity-driven rally will remain strong, but once the moratoriums across the world start ending, the actual state of affairs will become known.
The liquidity-fuelled momentum is expected to drive markets till September 2020, following which deflation and insolvency issues could arise, according to DSP Investment Managers. This could lead to investors holding on to cash.
The investment management firm gave a sense of how asset classes would fare between 2020 and 2030, which would be volatile. It stated that the asset classes which are likely to do well in the current liquidity-driven rally that could last till September 2020 are US equities and gold. “When you have liquidity-fuelled systems, where the interest rates are down and the money is not required to pay interest for now, one could see the rally continuing,” Debashish Bose, vice-president – products, DSP Investment Managers, said.
According to Bose, the current liquidity-driven rally will remain strong, but once the moratoriums across the world start ending, the actual state of affairs will become known. “When moratoriums around the world start getting lifted, that’s the period where we will know the state of affairs. Should in that situation the insolvencies start rising, it will have a deflationary impact and in that sort of situation only cash works not most other things.”
He added that the investors will start focusing on cash, the dollar, in this period which is likely to last for 18 months from September 2020. They could also look at the equivalent of the dollar, the US government bonds.
DSP Investment Managers also said in 2022 or 2023, there would again be a fiscal-led recovery which would be on a much larger scale than the current fiscal measures that most central banks across the globe have offered. This would cause a reflation. The roadmap then suggested that asset classes such as agri-commodities, emerging market equities, and gold are likely to do well. This phase is likely to last till 2025.
The last five years of the new decade starting 2025 would see stagflation or hyperinflation because of the fiscal-led reflation from 2023, according to DSP Investment Managers. In this scenario, currency would be at the focus and the asset classes that are likely to do well are precious metals, industrial commodities, resource and infrastructure equities.
The firm added that the global markets currently have large structural imbalances, which include excessive leverage through bonds and interest rate derivatives as well as the dominance of the dollar in foreign exchange transactions far in excess of US share of global GDP.