Podcast 17th April 2015
Risks are there in plenty for your Investments in this current era of cheap, excessive global liquidity. I have listed out five key risks that you must understand when you are investing you savings.
The first key risk is what happens when bond bubbles burst? There could be sell off of bonds globally and that would feed into India as well. FII’s have utilized over 85% of USD 81 billion limits on bonds and sell off will cause huge volatility in markets.
The next key risk is global growth, which is uneven and India’s trade could suffer due to relative currency strength and lack of demand growth. This would lead to India’s economic growth coming below expectations leading to muted corporate performance and fall in equity valuations.
The third key risk is what happens when Fed hikes rates or ECB and BOJ stop asset purchases or when they start hiking rates?. Can central banks prevent excessive market volatility when they withdraw stimulus? This is a huge question and no one has an answer for this now.
Right now deflation rather than inflation is the concern. What happens when cheap liquidity fuels rise in demand globally leading to rise in oil and commodity prices and inflation expectations rise? Will markets turn then. This is the fourth key risk
Finally India is seeing high capital flows but absorption capability will depend on government deepening reforms. If India cannot absorb capital flows without asset price bubbles and inflation, then it will cause economic instability.
The real world for financial markets in India is that global factors have an extraordinarily large effect on markets. We have two instances in the recent past that reinforces this point, one is the financial market crisis in 2008 that caused havoc on Indian markets and the other is Fed taper of asset purchases statement in May 2013 that caused a panic in Indian markets leading to panic reaction by policy makers.
Every Indian’s investment is affected by global factors.
Global liquidity is flooding markets and cheap excessive liquidity is adding to global risk appetite. Bond yields in many parts of the world are at record lows. Equity indices from S&P 500 to German Dax and Sensex, Nifty are at record highs. Bubbles are forming and can continue to form but will it burst and when will it burst. A huge question for all investors.
Subscribe to Gold, Silver or Bronze Retirement Plans of Investors are Idiots.com for investing your retirement savings. Please call Neelima at +919819770641 or log in to investorsareidiots.com to subscribe. Thank you for listening in.