Traditionally, the asset allocators have considered the potential return of the various alternatives (to equity and fixed income) to determine the portfolio structure of investors. Of course, the factors like size of portfolio, feasibility of investing in assets like real estate, risk appetite of individual investor, and liquidity requirements etc., influence the allocation to some alternatives. However, dematerialization of assets like real estate (through REITS), Gold (ETF) Bonds (bond funds, RBI direct investment platform etc.) now makes the alternatives relevant even for small investors.
In the past one year, the alternatives assets (e.g., gold, bitcoin) have performed significantly better than equities. Even the average yield of long duration bond funds has been similar to the Nifty50 return. The investors may therefore want to evaluate the return prospects of these alternatives in future to determine their asset allocation strategy.
In this context, I note the following to review my asset allocation strategy for 2025.
Bonds
Bond yields have consistently outperformed the equity yields in the past three years. In 2024, even the return on long duration bonds matched the Nifty50 returns. The consensus currently is that the RBI rate cut cycle in 2025 would be shallow with 25-50bps overall cut. Doubts are emerging on continuation of the Fed rate cut cycle also. The resilience of stock prices despite earnings downgrades, implies low chances of any material rise in equity yields. Bonds might thus remain an attractive asset class in 2025 also.
Gold
The World Gold Council (WCG) has forecasted a “positive but much more modest growth for gold in 2025”. The yearly outlook paper of WCG notes that “Upside (in gold prices) could come from stronger than expected central bank demand, or from a rapid deterioration of financial conditions leading to flight-to-quality flows. Conversely, a reversal in monetary policy, leading to higher interest rates, would likely bring challenges.”
The best case for Gold appears reversal in rate cycle with forecast of “higher for longer”. A dovish Fed, de-escalation of conflicts in the middle east and Europe, and lower intensity of trade wars, as compared to the present estimates, could be very negative for gold prices.
The weakness in USDINR, capital controls to manage balance of payment and change in duty structure are some additional factors to be considered for the Indian investors buying gold in INR. To me Gold appears less attractive in 2025.
Real Estate
The demand for housing remains robust, driven by resilient end-user interest and favorable macroeconomic factors. Inventory levels are now low in the ready to move category in most key markets. With new launches in mid segment slowing in the key markets, the prices are expected to remain firm in 2025.
As per Kotak Securities, Commercial real estate in top Indian cities saw healthy traction in 2QFY25. Vacancy levels inched lower. GCCs continue to lead the demand for commercial real estate, even as IT companies increased their headcount in 2QFY25 after six quarters of reduction; utilization rates remain high. Occupancy levels across asset owners have improved, aided by floor-wise denotification and consequent leasing of SEZ areas and a stronger push towards “return-to-office” by IT employers. Despite the recent price uptick, office REITs offer an attractive yield + appreciation play within Indian real estate. For me Real Estate (REITS) will thus continue to remain a preferred asset in 2025.
Crypto
More and more governments are now inclined to view crypto as a legitimate asset. President-Elect Trump has also hinted towards a favorable regulatory regime for crypto assets. As per the global investment major Fidelity, “Liquidity metrics have turned back to positive year-over-year growth, and we have entered another interest rate-cutting cycle. Inflation is still elevated above the Federal Reserve's 2% target and so I personally think there is still a risk of inflation coming back in a 'second wave.' Both of these things would be tailwinds for bitcoin.”
Despite a sharp up move in bitcoins, and high volatility it is difficult to ignore this emerging asset class in overall portfolio allocation.
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