A New World Order? Or a World Without Any Order?

Reflecting over the developments over the last few days, more particularly at the World Economic Forum, we ask ourselves: if, hypothetically speaking, the hegemon who is desperately trying to retain America's hegemony is no longer in power, will we be out of the woods? Will it be all hunky-dory again and can we go back to the normal course of investing into the good old stocks and bonds?

To be fair, the hegemon has done the world a favour by exacerbating a crisis which was in the making since a long time, and by making the rest-of-the-world countries realise their individual potential and cross-leverages.

No, we will not be out of the woods. As the real crisis facing the world will still be very much alive and cannot be simply wished away. The central bankers have printed way past the point of return. Failing an incredible productivity increase, they have only two options: keep printing to pay for everything till inflationary effects exacerbate, or tighten and reduce spending.

Both paths lead to devaluation of securities and savings on an epic scale. And the manner these problems are being attempted to be addressed by the hegemon is making the situation even more complex and messy.

As a result, what we are staring at is not just a new world order, but a world without any order.

What Could This Mean for Asset Classes and Currencies?

Equity

We have been saying since over two years now, that stick to equity exposure that you need, as per your required rate of return, and or that you can tolerate, your emotional readiness to withstand market corrections. Not beyond that. While this statement holds true, in general, the classic recency bias, fueled by the distribution-led wealth management industry, had led to individuals holding equity far in excess of what they should have, and that is worrisome.

It is important to underline that equities remain as the asset class which alone allows us to ride on another persons enterprise, and eventually if the enterprises you own, direct or through funds, are fundamentally solid, they will generate the returns, similar to the long term averages of equity markets. We estimate about 10% for Nifty-50, on a post-tax basis. Key is to hold on, when things become very volatile and the outlook is bleak. Also, please keep in mind that things can change. There is talk of a mother of all trade deals with the European Union. So it is advisable to not take binary bets on equity.

Bonds

For the returns high grade bonds are now giving (mid-single-digits), coupled with the additional risk of capital erosion (should yields go up), high grade bonds (which are typically bought through debt-based mutual funds), will be the relatively steadier part of your portfolio. And yet remain prone to interest rate risks.

That is one of the reasons we have been recommending a certain allocation to high yielding bonds. However, only through private credit funds which give you a diversified exposure across a basket of such bonds, not directly. We are seeing a lot of activity on direct high-yield bonds being shown by distributors. These expose you to both concentration risks and poor underwriting risks, and are, hence, best avoided.

Gold

This seems to be the default, go-to asset class. It will be volatile, but in a world which will struggle to find a replacement for US Dollar, the primary store of value, this is the asset class where money will continue to find its way. While in India, ETFs are by and large fully-backed by physical gold, gold in hand, meaning physical gold, additionally serves as a hedge to the financial system.

Bitcoin

This can be the alternate to Gold. However, given that Bitcoin is a relatively newer asset class, we prefer holding Gold.

Indian Rupee

We have long held the view that one should diversify equity exposure not just across sectors but across countries. Why restrict oneself to bet only on the enterprise of Indian entrepreneurs? This also helps in diversifying currency exposure and protecting purchasing power in foreign currencies.

A logical question could be that since it is widely expected that US Dollar will depreciate, why convert to a depreciating currency? Why not stick to Indian Rupee?

• One: when you invest in an overseas equity fund or ETF, and assuming it is a well-diversified global fund, you are holding the underlying stocks in the currency of the country in which the specific company is located.
• Two: diversification, as a principle, is done to reduce concentration risk. While the next year might turn out to be different, in the last one year, while US Dollar has depreciated against other currencies, Indian Rupee has depreciated against the USD. And hence, while INR has fallen by about 6.5% to 7% against the US Dollar, it has fallen between 15% to 20% against the Euro, GBP, and Swiss Franc.