How people can keep their investments less vulnerable to events in 2024

It’s time to reflect on events last year that made us form views and opinions for the future. On the global financial market front, 2023 turned out to be a bad year for economic forecasters, who sounded unusually pessimistic. Banks like Silicon Valley and First Republic went bust, and Credit Suisse—one of the largest banks in Europe—going belly up created fear of the contagion risk. US 10-year treasury yield which almost touched 5%, surging crude oil prices and the Hamas-Israel war made it feel that global recession and uncertainty were almost knocking at the door.

What transpired was the opposite. Markets across the globe, including the US, went up more than 20%. Bitcoin prices more than doubled. Gold prices touched a lifetime high. Inflation eased, and the US GDP grew over 3%, a feat achieved convincingly after 2005. Unemployment rate in the US fell to a multi-year low. Spending on consumption, travel, and hospitality boomed. On the domestic front, Indian economy also did exceptionally well, and the stock markets hit lifetime highs. With the US Feds decision, to hold a rate hike and cut rates in 2024, the expectation of recession seems to be out of the window.

2024 holds answers to some of the key events and issues that one should be aware of:

The elections year: 2024 is going to be the year of elections. An estimated number of over 4.1 billion people out of the total global population of over 8 billion are living in countries that will go to polls in 2024. According to Bloomberg, countries that contribute 80% of the world market cap and 60% of global GDP will be voting. These include India, the US, and Indonesia, where a regime change can have the potential to derail the path to the progress of the respective economies as well as the potential to derail global growth.

Globalization: The idea of protectionism has gained momentum after the covid-19 pandemic. Most nations want to “derisk” their supply chains, keep production at home or closer to home, and are willing to re-negotiate trade pacts and trade relations. Special incentives are being doled out to keep manufacturing local. Production-linked schemes in India and, the CHIPS Act in the US are a few examples. If nations start choosing their trade partners based on convenience and economies of scale, poorer nations will be the biggest losers. The gap between richer and poorer nations will widen further resulting in coups and civil wars. We are already witnessing the same in some African countries like Sudan. Economic prosperity is the key to peace. Re-election of leaders who support protectionism will have its long-term consequences.

Geopolitical risks: Geo-political risks always pose a threat to the markets and economy alike. China’s quest to conquer the Sea of Japan and Taiwan, the ongoing war between Russia-Ukraine and Hamas-Israel, Saudi Arabia’s policy trade-off between its efforts to become a liberal economy and its support to Islamist States in its neighbourhood, and Indo-China relations in the subcontinent are some of the developments which need to be keenly watched in the coming year.

Destination India: Experts’ consensus remains hopeful about India’s economic growth. Strong consumption demand and, a switch from unorganized cash-based transactions to organized “accounted” transactions are helping growth. The narrowing of the fiscal deficit and the expected shift in the manufacturing base to India will keep India an attractive investment destination.

It is important to understand how an Individual Investor with limited experience, decision-making tools, and resources compared to an Institution can keep its investments less vulnerable to the outcomes of the events.

What comes in handy is the concept of diversification. It helps in reducing the risk that comes from exposure to a single sector or asset or single nation. Investing in diversified financial instruments, and asset classes helps mitigate unsystematic risk. For instance, gold has an inverse relationship with equities and bond prices are inversely related to interest rates . Keeping some amount of cash to meet emergency requirements also is one form of diversification.

And as Benjamin Graham said, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

Jay Prakash Gupta is founder of Dhan.

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Published: 02 Jan 2024, 09:36 PM IST

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