The past 10yrs (2013-2022) have been a period of great uncertainty and turbulence for the global economy, financial system and markets which were considerably weakened by the global financial crisis in the preceding five years.
Supported by abundant liquidity and lower rates, the markets weathered Tapering 1.0; Brexit; Covid-19 pandemic; Sino-US tariff war; remarkable shift in weather patterns; handing over Afghanistan to Taliban; Russia-Ukraine war; out of control inflation; and burst of technology stock bubble rather well. The end of near zero rate regimes and monetary tightening in the past one year has however made the markets jittery.
The current generation of the market participants (investors, bankers, analysts, intermediaries, and policy makers etc.) who are in their 20s and 30s have never practically experienced persistently higher inflation and consistently rising interest rates. They might have read case studies of the 1970s and 1980s era; but that is usually not a good substitute for personal experience. No surprise that their response to the situation, in terms of strategy, has so far not been adequate.
Despite historically low rates and unprecedented liquidity, the economic growth has been dismal and returns on various asset classes are not commensurate with the risk involved. Emerging markets which are usually beneficiary of lower rates and easy liquidity conditions have struggled, in terms of growth, asset prices and price stability.
Commodities performance subdued
Commodities that are considered proxy to growth, e.g., copper and crude oil, have fared poorly over the past decade despite near zero rates and abundant liquidity. Nymex crude oil prices have yielded a negative 2.3% CAGR; while copper has growth at a CAGR of 2.5%.
During 2020 we saw a massive anomaly in crude markets when Crude Oil futures traded at a massive negative US$37/bbl price for a day. Similarly, the Russia-Ukraine war and subsequent NATO sanction on Russia, created massive uncertainty over availability of gas to major European countries, sending them on a gas hoarding spree. Natural gas prices rose over 100% within 6months of the beginning of war; only to correct 80% from the recent highs closer to 2020 Covid lows.
India has held well
In all this turbulence and mayhem Indian economy and markets have held up strong and steady. Though things have been challenging in the past six quarters; over the past decade Indian assets (Equities, INR gold, bonds and USDINR) have yielded decent returns, outperforming most emerging markets and developed market peers.
The benchmark Nifty50 yielded an 11.3% CAGR in local currency over the past 10yrs. Even in USD terms, it yielded a decent 7.7% CAGR, much better than Chinese, Japanese, and European equities. USDINR depreciated at a CAGR of 3.4% over the past decade, making it one of the most stable currencies amongst larger emerging economies.
Cryptoes emerging as popular asset class
Cryptocurrencies have emerged as a major asset class over the past one decade. The value of the top cryptocurrency, BITCOIN, has grown at a CAGR of ~75% over the past one decade. Of course, given the poor understanding, still lower acceptability and strong challenges from governments, central bankers and traditional bankers, the volatility in prices of cryptocurrencies has been extremely high. Of late we have seen gradual rise in acceptability of Bitcoins.
A number of unscrupulous and untested business models emerged in trading, custody, and/or otherwise transfer of cryptocurrencies; causing tremendous losses to the unaware and greedy investors. This may reduce over a period of time as acceptability and awareness about cryptocurrencies improves.
Trend may continue in medium term
Currently a number of developed economies are struggling with demographic challenges; massive monetary overhang; unsustainable public debt; geopolitical tensions, and leadership vacuum. On the other hand, the Indian economy is gaining strength on the back of a favorable demography; disciplined fiscal; exemplary monetary policy; a decade of massive investment in capacity building, especially in physical infrastructure and import substitution (also see Time for delivery is nearing). It is therefore likely that Indian assets may remain steady and offer decent returns over the next decade also.
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