Menu
Diwali, the festival that signifies prosperity with Goddess Lakshmi taking centre-stage, is a time for celebrations. The Samvat year (Hindu new year) that follows is time to make resolutions and plan for the future. One key aspect of planning is setting financial goals and achieving financial security. While it is a norm to buy gold during Diwali (especially during dhanteras, which precedes Diwali), you must keep in mind that it’s important to limit your gold purchases and look towards equity investments to build your wealth, fulfil your financial goals and achieve financial security.
You may ask – why equity? There are 5 key reasons why equity investing has the potential to offer lucrative returns going forward. These are:
Interest rates are low. Interest rates across the globe are at the lowest levels historically. While rates are negative in countries like Japan, they are at near-zero levels in the US (0-0.25% declared by the Federal Reserve of the US). Interest rates in India have nearly halved over the last decade (from 8-8.5% in 2012 to 4% today). As a result, investors find debt investments unattractive and have moved to equity to achieve better returns.
Low crude prices. Crude oil, a key input component for most industries, is currently at around $40 a barrel. Crude prices are expected to plateau at about $38 a barrel, which is favourable for the Indian manufacturing sector. This will help companies pass on the benefits of lower input costs to customers in the form of lower retail prices of their products. This, in turn, will improve affordability and possibly increase consumption.
US elections to favour opening up US markets. With the conclusion of the US elections resulting in change in power from the Republican president Donald Trump to the Democratic president-elect Joe Biden, there are strong possibilities of a shift from high import tariffs and closing the US to immigration, to opening the US to trade with the world and more economic gains for world markets. For India, the US is one of its largest markets for most sectors and change in power to a more benign reign in the US will be very advantageous for India.
Relief packages leading to liquidity. The novel coronavirus (Covid-19) has resulted in job losses due to strict lockdowns. To support citizens, most governments have announced large relief packages which are a combination of putting money in the hands of the citizens and offering basic necessities to help people (especially the poor) sustain themselves. A large portion of the monetary component of these relief packages is finding its way into capital markets, which has resulted in higher demand for stocks. This has driven up stock prices, which are expected to continue their upward movement going forward.
Preventive and curative remedies for Covid-19. There are a number of pharma companies in the process of creating vaccines to prevent the spread of Covid-19. A few are at their final stages of human trials and are expected to be made available to the public in the first half of 2021. This will lead to a surge in economic growth with personal mobility and freedom being reinstated and people being able to go back to work and resume normalcy.
‘Begin Again’; economy has restarted. Meanwhile, with greater understanding of the virus and adopting preventive measures (wearing masks, washing hands and social distancing) being adopted, governments have moved ahead to reopen the economy. This has brought business activity to near-pre-Covid levels and is expected to further accelerate going forward.
To conclude… Equity investing, while having the potential to outperform other asset classes such as gold, real estate, etc. requires extensive research and analysis, understanding global and domestic developments, sectorial movements, specific businesses of companies with investment potential, etc. Making informed decisions to build your equity portfolio based on your risk profile, return expectations, financial goals and other aspects will take you a long way in limiting risks while optimising returns. Millennials will find investing in equity especially fulfilling if they think long-term (avoid getting swayed by short term market gyrations), stick to the plan to fulfil their financial goals (don’t abandon investments just because markets have moved downward… volatility is part and parcel of equity investing) and stay focused on building personal wealth.
Happy investing!
