Inflation and recession are real life ‘villains’ in an economy, eating into investments and wealth. Thankfully, investors can monitor inflation and economic slowdown with telltale signs all around, said Lakshmi Iyer, CIO-Debt, Kotak AMC, and Rahul Bajoria, Chief Economist-India, Barclays Investment Bank, at FinancialExpress.com Manage Your Money session titled ‘Reading the tea leaves in inflationary and recessionary economies’. Investors must watch these two demons to reallocate assets in order to prevent those from eating into their savings and investments.
What your 11:00 pm movie show, food delivery time tells about inflation
When the 9:00 am or 11:00 pm movie shows are running housefull, it could be an indicator that inflation is “skyrocketing”, Lakshmi Iyer said. On the other hand, food delivery delays even on a bright sunny day, or waiting time in restaurants increasing to 10-15 days, could be other feelers that indicate there are more mouths chasing fewer avenues, she added to the list of anecdotal signs to watch for inflation. However, one needs to know if the demand decline is due to any major structural factors. There must be a distinction between what is cyclical and structural as that has a big impact on where you should be investing, said Rahul Bajoria.
What to look for globally, domestically to identify signs of inflation, recession
Households must be aware of what the RBI is saying about the health of the economy and what different measures are being taken to contain inflation as these tend to give a sense of direction where inflation is going, said Rahul Bajoria. Demand coming off, gold prices, crude oil prices, US Fed monetary are also a good barometer to see where the inflation is headed and the state of the global economy. Onion, potato and tomato prices can also help people get a stock on inflation.
Slowdown in sectors (auto, hospitality, agriculture, services) which contribute to India’s GDP, increasing unemployment are some of the signs that the economy is growing at a slower than necessary pace, said Lakshmi Iyer. Historically it has been seen that periods of high inflation have been followed by slow economic growth. So, households need to watch out for interest rate hikes by central banks, monetary policy tightening to brace for slowdown in economic growth or recession, said Rahul Bajoria.
Inflation: Good for some assets, bad for others
Inflation is a real life villain which eats into your earnings, said Lakshmi Iyer. The pinch is felt by people on monthly household items, said Rahul Bajoria. “You need to understand the drivers of inflation to take a call on how to manage your assets, investments and grow the stock of savings,” he said. However, inflation also acts positively on some asset classes. For physical asset classes like real estate & gold, inflation tends to be a harbinger of prosperity, said Lakshmi Iyer. “But other asset classes like fixed income or bank FDs, tend to befriend inflation with a lag,” she said. For equity asset classes as well, some amount of inflation is good.
Go for 1s and 2s to play a longer game
Talking about how investors can go about relocation of assets in their portfolio based on economic, inflation, recession signs, Laksmi Iyer said that one should not reallocate every time there is a geopolitical crisis or any other small event. “Markets have an uncanny ability to discount certain events, so the longevity of your stay in any particular asset class has got a way better potential for wealth creation than reallocation every few months,” she said. Explaining with a cricket analogy she said, “Sometimes, it is ok to take 1s and 2s and even leave some balls rather than hitting 4s and 6s as the chances of getting caught at the boundary is way higher than when you are hitting those 1s and 2s.”
Diversify to cushion investments from shocks
Investors need to identify the larger trends as there is no ‘one-size-fits-all’. It is important to keep the portfolio well diversified which will allow you that ‘Zor ka Jhatka Dheere Se’”, she said. Rahul Bajoria agreed with that sentiment saying that investors have to ensure that portfolios remain reasonably well diversified and up-to-date with what’s happening in the world. But it is equally important to believe in your own thought process and back yourself to make the right calls.