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The good and bad of markets

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It is that time of the year when we celebrate the victory of the good over the evil. Investing is an art or a skill that requires you to be on top of the good inside you. It is a ‘good V evil’ battle on two fronts. Investment decisions taken on the back of emotions could hurt your long-term wealth creation. These are internal risks to your investments associated with your personality. The sudden spurt in conflicts worldwide presents an external risk to your investments. They put pressure on inflation, the biggest enemy of equity assets.

The internal conflict

Your investment skills are tested when you act based on events. If you are the kind of investor who presses the panic button when there is a slight hint of risk, you could take investment calls based on emotions. If you are a long-term investor, you know the importance of staying invested as financial markets go through cycles. Equity markets are tricky at the moment. There is a run-up in mid-cap and small-cap companies. Large-cap stocks have witnessed a sluggish year so far. That is probably a function of benchmark indices like the Nifty and the Sensex near or over record highs. With interest rates firm, there is very little headroom for share prices to increase. The situation in the Middle East is due, and Europe remains hostile. Foreign institutional investors are finding peace in bonds across markets. US 10-year treasury bond yields are near 5%, the highest since 2007. That is a warning signal for the global markets. Many pundits are predicting an imminent global sell-off. In such a situation, you may be tempted to sell too. Doing so in a herd could hurt your long-term investments.   

The external conflict

The rising tension in the Middle East presents a clear and present danger to the global economy. In an assessment of commodity prices published last week, the World Bank said oil prices and other commodities could see an upside risk. If the Israel-Hamas conflict spreads to other regions, it could trigger a surge in oil prices by as high as 75% in the worst-case scenario. That could spread to other commodities like natural gas and hurt food prices, too. Ukraine’s exports of food grains and oilseeds are stalled due to the Black Sea supply chain disruption. If that continues, it could affect global food prices even further. Severe weather conditions due to El Nino could hurt agriculture and metal mining production. Such headwinds constitute an external threat to your investments. They keep inflation high and put pressure on the rupee as well as interest rates.

To win, you may want to look for a portfolio that is relatively insulated from their impact. You must read a lot and work on shortlisting companies that show resilience. For example, businesses in the infrastructure sector in India are expected to perform well as they get more contracts from the government. If you are not interested in figuring that out on your own, you can take help from technology and create a basket of stocks based on data analytics. That would be a gift you would give yourself this festive season.


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