Investors’ dilemma

The behavior of Global markets has always been perplexing for the participants. The past 8-9 months have been no different in that sense. Stock prices, commodities, cryptos, bonds, and precious metals have all moved higher; in many cases without a fundamental case for such an upmove.

Investors who typically manage their risk through diversification, hedging and alignment of their portfolios with economic fundamentals and corporate earnings, usually underperform in this kind of market and have reasons to be disappointed. Some of them, who usually invest on borrowed conviction, surrender to the fear of missing out (FOMO) and indulge in unnecessary churning of their portfolios resulting in violation of their standard asset allocation, and accumulation of momentum assets at high prices, only to regret later.

Traders, on the other hand, ought to love this kind of markets, when most asset classes are moving in one direction, with low implied volatility. Theoretically, in the current state of markets, traders would be limited only by their upfront margin they could afford to put for taking trading positions.  

However, this does not appear to be the case, at least in case of Indian investors and traders. Anecdotal evidence suggests, several investors who yielded to FOMO have taken unplanned exposure in international equities, precious metals, and small cap stocks. Traders have also either lost money or made less than par returns due to high realized volatility (though implied volatility remains close to lowest ever levels), erratic sector churning, frequent large move at the market opening (gap up or gap down), and multidimensional news flow, often cancelling each other, e.g., strong GDP number and penal tariff by the US.

Incrementally deteriorating economic conditions, worsening fiscal profiles, elevated stress on financial system, provocative geopolitical shenanigans, worsening demographics, debasement of major currencies, and rising civil unrest and violence in most part of the word, do not augur well for the risk assets (e.g., equities), commodities, and bonds (especially treasuries).

Adding to the persisting geopolitical tensions, anti-immigration protests are taking violent turn in many of the European countries, besides Australia, and the US. A Gen Z coup in Nepal has added a new dimension to the civil unrest by introducing a new template for revolution/anarchy.

Traditional and strong alliances like the US and European Union and the US and Japan, are showing distinct signs of weakening. The probability of a paradigm shift in the global balance of power is becoming even stronger, by the day.

Under the given circumstances, assets totally unrelated to economic conditions and neutral to geopolitical jurisdictions, especially gold and crypto, should ideally be the safe haven refuge. Accordingly, neutral safe havens (gold and crypto) have done exceedingly well YTD2025.

Investor’s dilemma

·         Allocation to these apparently safe haven assets, like gold and bitcoin, could not be meaningfully high (say more than 10-15%), in tandem with assets like equities and bonds. At best these can be used as partial hedge, till the issues bothering the global economy and markets get settled. At the end these assets derive value purely from wide acceptance, and not from any intrinsic economic value of their own. This acceptance can diminish in due course, as the global issues driving safe haven demand get settled. It has been the case many times in the past.

·         These assets are still priced in USD terms, a benchmark which is under a serious threat itself, and a primary reason for the investors to take refuge in these safe haven assets.

·         The equities of countries like Germany and South Korea, which are struggling to avoid recession and facing domestic political crises, are the best performing equities YTD2025. How do investors manage their portfolios based on economic fundamentals?

·         There are indications that the US equities (especially tech sector) and private credit may be flirting with the boundaries of the bubble/sub-prime realm. Under these circumstances, a prudent view would be to expect a sudden crash like 2000 or 2008. How an investor incorporates this view in his/her investment strategy is a challenge.

…to continue