Time to revisit your investments?

Okay, today’s newsletter is not to tell you about where to invest. Rather, it is to help you understand the current economic scenario and related products/commodities that can affect your investments. And after reading this, I think you will yourself be able to determine what to do with your money.

Stay with me, this is going to be interesting!

First of all, we’re in a global economic slowdown. Inflation is really high, companies in US have started laying off employees, and with the Russia-Ukraine war going on, the European Union has now banned Russian oil imports. Now, with oil imports getting banned, the price of crude oil is going to rise further.

“Toh main kya karu boss? I don’t have a car or bike. Why should it matter to me?” you ask

Well, here’s why - oil is used as an input for a lot of industrial products and manufacturing. With crude oil getting more expensive, it raises the cost of production for a lot of companies. With the cost of production increased, a lot of companies increase their eventual selling price. Which is why, one major reason for the high inflation is the high crude oil prices.

Along with high inflation, we are also seeing the rupee become weaker. What I mean by weaker, is that, hypothetically, if tomorrow you were to, say, go to the US for a vacation (man, I’d envy you if you were going) and you want to get foreign exchange to spend there, you would have to spend more INR to exchange for 1 USD. So when it comes to INR-USD exchange rate, higher the INR value, more the amount of rupees we need to shell out for 1 dollar, and therefore weaker is the rupee.

Now, let’s look at commodities like Gold. Historically, it was observed that gold acts as a hedge against inflation. By hedge, we mean that if you have gold investments, you are protected in case of inflation, because, we just read that inflation means that things get more expensive. So gold also gets more expensive, which means that if you had invested in 1 gram of gold when it was 50000, it is now more expensive, and is at 55000 - so your investment has actually grown.

So if you’ve bought gold in the past, Aaj khush toh bohot hoge tum, hain?

Easy, tiger. Not so soon. In the recent past, the “gold is a hedge against inflation” theory has been busted quite a few times. You see, you can’t just view inflation and gold prices in isolation. There are a lot of factors at play that determine prices of various commodities, apart from inflation. Even right now, gold prices are not technically shooting up, although we’re experiencing a really high inflation; they’re more or less stable (except when they reached 55,000 in March for a brief period)

So your past gold investment may not give the best returns right now, even after inflation.

Now let’s look at how cryptocurrencies are doing.

In just the past one month, Bitcoin prices have dropped to USD 29,000 (INR 23 lakhs) from USD 39,000 (INR 30 lakhs). Ether, etc are also seeing similar drops. Crypto is extremely volatile, especially because it is still in its infancy. We’re too early right now; we’re just exploring cryptocurrency. And while it may be a promising currency for the coming decade, data says that it is also one of the most volatile products to invest in right now.

Okay, now coming to the stock market. The Sensex has hovered around 55,000 in the past one month. It was 60,000+ in April, so this is almost a 10% drop. Now, nobody can predict the stock market, but it would be safe to assume that it will take a while to recover, and may stay volatile for some time.

You see, stock market performance depends on a lot of factors - global economy, inflation, debt market (we’ll cover that some other time), capital available in the economy, etc.

Fundamentally, the stock market works on basic demand-supply economics. As with everything else, even for the stock market, if there are more people who want to buy a particular stock, there will be more demand, which means that prices of the stock will be higher. If lesser people want to buy stocks, demand is lesser, which means the stock will be cheaper.

Now, people like you and I are retail investors, who contribute a smaller amount of money to the stock market. The majority of the money that is invested in stock markets is done by Institutional Investors (we’ll call them IIs). These are entities like banks, mutual funds, hedge funds etc who buy and sell shares in the stock market.

So, when you and I buy or sell a particular stock, doesn’t matter much. Our stock purchase is just a drop in the ocean. Because it is the IIs who actually form the major chunk of the stock market, and they’re the ones whose demand-supply determines the stock prices.

Now, as you’ve seen, a lot of the variables are haywire right now. Inflation is high, oil prices are high, global markets are in poor shape. And in such a scenario, therefore, there may be a lot of volatility when investing in stocks, gold or crypto.

Well, today’s post isn’t about managing your finance, or what you should do. It’s about talking about how the economic condition is at present, so that when I write more newsletters going ahead, you’ll be able to make more sense of them :)

Also, I’m doing an interactive activity going forward. I get a lot of messages from people saying they want help to plan their finances, but I’m not able to devote enough time for all.

So here’s the thing - if you’d like to have a one-on-one discussion with me where we discuss how to manage your money better, you just need to do this:

1. Share this post on LinkedIn, write one learning, and tag me (Ankur Jhaveri)

2. Share this post on Instagram as a link in your story, and tag me (@jhaveriii) - we just started our IG handle

And I’ll setup one-on-one calls in the coming week with 10 of you who have posted your learnings, where we’ll create a plan for you to manage your money, together!

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Till next weekend, Adios!