Do it yourself

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.

Not putting all eggs in one basket is perhaps one of the oldest risk management techniques. In the financial investment parlance, this is commonly called “diversification of portfolio”. Over the years this technique has worked well for investors in managing risk.

 If I must choose one word to define the current global situation, it will indubitably be “tumultuous”. There is commotion, agitation, emotional outbursts, upheaval, chaos, distraughtness, indecision and haphazardness in almost all spheres of life – be it economics, finance, governance, politics, or geopolitics. As the trust deficit deepens and widens further, the leaderships are dissipating fast.

USA and UK which have provided political leadership to the world in most of the past hundred years, no longer enjoy wide acceptability. In fact both the countries are struggling to manage even their own internal conflicts. The trends elsewhere also suggest that people are choosing perceptibly stronger and decisive leaders to lead in these tough times. Some examples are Brazil, Israel, Sweden, Italy, and China.

Geopolitically, the hegemony of NATO is facing serious challenges from the new alliance of Russia, China, and North Korea, who have not shown much respect for the extant global order. The largest energy supplier to the world, OPEC also appears inclined to move away from the present system of petrodollars and dominance of western developed economies.

Despite the pandemic; severely inclement weather conditions prevailing for the past couple of years over the most parts of the world (especially the developed world) and extremely painful energy crisis in Europe; the global leaders gathered in Sharm-el-Sheikh (Egypt) for COP27 conference are least likely to come to an equitable and effective agreement over climate change.

The global markets are in turmoil. The illusion of stability created by central bankers of developed economies post the global financial crisis is fading fast. Most of the money printed by the central bankers to keep the wheel of markets moving has been used to fuel prices of financial assets and boost bank reserves. Very little went into building new productive capacities. The unscrupulous politicians were happy to unleash a regime of blunderous fiscal profligacy using the abundant and cheap money.

The deceptive wealth effect created by artificially inflated asset prices, especially financial assets, has been crushed by the shortages of food, energy, and workers unwilling to work etc. The business models built on “dreams” are crashing down. The stock prices manipulated through leveraged buybacks using zero interest borrowings are correcting to their realistic valuations. The gullible investors who ran ahead of time and mistook crypto (a medium of exchange) for valuable assets are also facing a reality check. They are also realizing that all NFTs may not be as valuable as a work of Picasso.

As things stand today, we may soon find ourselves standing at the same crossroad where we stood in autumn of 2008. The markets may implode. The inflated asset prices may burst. The headlines might again be dominated by scary jargon like PIGS. Many Lehman-like castles may come crashing down. Globalization may take several steps back, before a new world order emerges.

Many may find these thoughts unnecessarily provocative and scandalous. There could be strong arguments in favor of India as an oasis of stability and growth amidst all this global chaos. But I am not a great admirer of Ms. TINA. I shall not live under any illusion of the Indian economy and markets escaping a global Tsunami; though I am confident that India shall survive it and soon get back on her feet. The key however is to “survive”.

Also read…Stay cautious

The Federation of Indian Chambers of Commerce & Industry (FICCI) in a recently released knowledge paper – “Metaverse and Emerging Opportunities” – highlighted some interesting aspects of this massive opportunity that has the potential to transform, inter alia, the way we work, study, communicate, entertain, socialize, get healthcare and transact with each other. The following are some excerpts from the FICCI paper that I believe are relevant for researching Metaverse as an investment theme.

What is Metaverse?

Meta (Beyond – Greek Word) + Universe (English) = Metaverse is an offering which provides users immersive and multisensory experiences using futuristic technologies.

In technical terms, Metaverse is a network of 3D virtual worlds focused on social connections. It is a collective virtual space, created by the convergence of virtually enhanced physical and digital reality. It is an independent virtual economy, enabled by digital currencies and non-fungible tokens (NFTs). It is device independent and is largely democratized and not owned by a single vendor. Metaverse is built on a combination of Blockchain, Virtual Reality (VR), Augmented Reality (AR), 3D hologram, and Video.

Metaverse allows people to enhance or mimic their physical activities in the virtual space. This could mean transforming the existing physical activities that one is doing or by transporting to a new virtual world. Presently, multiple Metaverses are functioning independently from each other, having a functionality of their own. However, as the concept evolves, we shall see large Metaverses encompassing all the activities with broad functionality, or even conglomerates of multiple Metaverses integrated with each other.”

The opportunity size

A recent Citi report predicts that with 5bn potential uses, the total addressable market for the Metaverse in B2B and B2C segments could be between $8 trillion and $13 trillion by 2030.

Gartner expects that by 2026, 25% of people will spend at least one hour a day in the Metaverse for work, shopping, education, social media and entertainment. Metaverse is a trillion dollar opportunity per year around 2030 onwards while it is a $60billion now in 2022.

On the B2B segment, some of the use cases include:

·         Transformation of “Workspace collaboration” with always ON conference/meeting rooms for global meetings, conferences.

·         Talent acquisition, hiring and onboarding taking a new dimension in Metaverse

·         Digital test run of products and experience different options.

·         Learning, education, training, skill development with avatars (manufacturing, factory setups will get good leverage with this tech)

·         Healthcare (Telemedicine, Therapies, Surgeries)

·         Defense (Training, On-boarding, Recuperation, Simulation)

·         Real-estate, E-commerce companies can have product demos, showcase and branding opportunities

·         Advertising will move to the next level with a unique kind of storytelling experience for the audience using 360 videos and 3D technology.

B2C use cases for Metaverse include

·         Gaming and entertainment

·         Education, Learning, Skilling

·         Travel and Tourism

As a consumer I could already imagine a few things like:

*  No need for expansive showrooms for automobiles, electrical appliances, electronics, watches etc. Virtual shopping malls could be equally popular as the traditional shopping malls.

*  Much less need to physically visit doctors for regular consultation.

*  Much less frequency of business visits. Virtual conferences, book launches.

*  Lower frequency of visits to stadiums for watching games; or to theatres for watching movies.

*  No need for physical coaching/training centers.

*  No need for builders to make a sample flat or employ a huge sales team.

All of this essentially means less traffic on roads and lesser use of air conditioning and therefore less pressure on the environment. The present generation which is reasonably tech literate and is more comfortable with virtual shopping, working and socializing could be hitched to the Metaverses with broader functionalities.

Key concepts

The Metaverse is composed of many core elements that are combined together to provide a whole new world to the users. These technologies include eXtended Reality (XR), Blockchain, Artificial Intelligence and the Internet of Things but are not limited to them.

Blockchain is a shared, immutable ledger for recording transactions, tracking assets and building trust. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.

A non-fungible token (NFT) uses the technology of blockchain to create something that is unique and irreplaceable in the digital world.

A cryptocurrency, crypto-currency, crypto, or coin is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction.

Artificial intelligence (AI) is the ability of a computer or computer-controlled robot to perform tasks commonly associated with intelligent beings like humans.

The eXtended Reality (XR) is a superset that covers Augmented Reality, Mixed Reality and Virtual Reality. Virtual Environments are considered as synthetic or computer-based spaces.

The Internet of Things (IoT) is a network of people, devices, and services [2] that can sense, connect to one another, make inferences, and act(uate) at scale. It is considered that over 30 billion IoT devices are already deployed globally today.

 No need to lose sleep over NASDAQ

When the independently priced cryptocurrencies were melting in the past few months, a stablecoin Tether (USDT) has been relatively much more stable. The value of USDT did show some volatility, but it was marginal in comparison to some other stablecoins like Terra and independently priced cryptocurrencies.

Being a technology challenged crypto illiterate person, I must outline my understanding of a stablecoin to make the context clear. In my understanding, a stablecoin is a crypto token which is backed by some financial or real asset, whose value is pegged to a fiat currency like USD. In simple terms, it is a tradable electronic entry priced in a fiat currency (like ADR of an Indian company tradable in US) which has an underlying asset like bonds. Theoretically, the price of a stablecoin shall move in tandem with price of the underlying; but in practice the movement in price could be less or more than the underlying.

Curious by the relative stability of USDT, I discussed the issue with some experts and crypto traders. While no one offered any satisfactory answer, the common thread was a conspiracy theory. It is commonly believed that a significant part of trade by “sanctioned jurisdictions” like Russia, Iran etc., is happening in stablecoins, USDT being the most popular one. Secondly, it is suspected that USDT is also a preferred currency for money laundering in many emerging economies.

Of course, I do not understand much of this, so I cannot make any intelligent remarks on this. Nonetheless, I must say that (i) tech enabled alternatives to gold are here to stay for long; (ii) the challenges to USD as the exclusive global reserve currency are rising gradually; and (iii) the global economy (and markets) might delink from US economy (and markets) sooner than previously estimated.

The experts have extensively talked about Japanification of the US economy (and markets) since the global financial crisis (GFC) hit the world in 2008 and the US Federal Reserve unleashed a torrent of quantitative easing (dollar printing). With massive monetary and fiscal corrections now becoming increasingly inevitable, in view of the rapidly changing (a) global trade dynamics and (b) global geopolitical balance; the probability of experts’ prognosis about the US economy coming true is rising gradually.

In my view, the forecast for the global economy and markets for next few years must account for these probabilities; howsoever small these probabilities may appear for now.

I would therefore not like to undermine the movement in NASDAQ and S&P500 to form my view on Indian markets and/or deciding my allocation to say IT services sector, for next few years. I would also like to read the predictions about a “lost decade for equities”, in relation to developed markets, especially US, without correlating it to India. I am also aware of the fact that equities in two major global economies China (15yrs) and UK (5yr) are already witnessing this phenomenon of lost decade; and this has not impacted the performance of other European and Asian markets materially.

In simple words, I do not see much merit in drawing correlations between GOLD-S&P500; Nifty-S&P500; and NIFTY IT-NASDAQ. The Beta of Nifty vis à vis S&P500 and NASDAQ shall reduce incrementally. There is no need to stay awake till late night to watch US markets.

The weather in India these days is as diverse as the country itself. There are severe floods (usually not seen in pre monsoon period) in North East; cyclonic storms in East and South East, torrential rains in South; drought in North and scorching heat in North and West. Power supplies are challenges; wheat has ripened early; sugar cane is drier; seasonal vegetable crops have been damaged.

The past few months have been quite trying for investors and traders in the financial and commodity markets. The markets have been jittery, and indecisive. Obviously, the market participants are becoming somber in their market outlook for the short term.

The global order is perhaps undergoing a major reset and the picture of emerging global order is incomplete. Consequently, the present global economic, geopolitical and financial conditions are quite uncertain and challenging.

As per the conventional wisdom, at this time the investors should be busy assessing the likely contours of the emerging global order, forecasting the investment opportunities and positioning themselves as per their assessments; whereas the traders should be deciphering the opportunities arising due to the transition. The shifting investors’ positioning may create opportunities for the traders in the markets.

I noted the following key trends in the markets to assess how the investors’ positioning is shifting and where traders are finding opportunities. However, I am not sure if the current market positionings are totally in consonance with the conventional wisdom. Maybe, it is early days in the transition; or the uncertainties are too much; or it’s a combination of both. Perhaps, we would know this with the benefit of hindsight only.

1.    After lagging the emerging markets for 15years, the developed markets have started to outperform in the past one year. Prima facie it may look like a case of rising risk aversion amongst global traders. But investors must be appreciating that the risk in developed markets is much more pronounced than the emerging markets. The central bankers may have exhausted the newly acquired monetary policy tools that supported the developed economies and consumers in the post Lehman era. Unwinding of unsustainable liquidity and debt may bring more developed economies to the brink than the emerging markets.

For example, in the past 5years most of the sovereign debt issued in the Euro area has been bought by the European Central Bank (ECB). The countries that infamously came to the brink during the global financial crisis (Spain, Italy, Greece etc.) have raised huge debt without demonstrating any sustainable improvement in their servicing capability. Now since the ECB is unwinding its bond buying program, next year over EUR250bn worth of sovereign debt will have to be sold to the private investors who may not be as obliging as ECB has been in the past 12years. Unsustainable debt at the time of rising rates would make these countries riskier than the emerging markets like China, India, Brazil, Korea etc.

Even the USA, is facing a stagflation like condition. Rising rates may make USD stronger and hurt the US exports, further pressurizing the growth.

2.    Most of the countries are struggling with inflation that is mostly a supply side phenomenon. However, instead of improving the global cooperation to ease the supply chain bottlenecks and stimulate investment in further capacity building, most countries have chosen to stifle the global cooperation and invest in local capacities. This will (i) prolong the present supply shortages and (ii) have far reaching implications for global trade and cooperation.

3.    Investors have not preferred the conventional safe havens like gold, CHF, US treasuries etc. in the past one year and the EM currencies have not sold out the way these used be in past instances of extreme risk aversion.

4.    Numerous experts are calling for commodity supercycle and persistent inflation. This is a clear case of mistrust in effectiveness of the central bankers, who have not only successfully averted two major disasters in the past 12years – first the global market freeze post Lehman collapse and secondly global lockdown post outbreak of pandemic. I find no reason to believe that they will fail in reining the inflation using monetary policy tools. In fact most commodity prices have shown signs of peaking after the US Fed's aggressive posturing on monetary tightening. Higher cost of carry, tighter margins and slower growth should kill the inflationary expectations in no time; particularly when most of the commodity demand could actually be speculative or in anticipation of future demand assuming the present tightness in supply to continue.

For record, the commodity heavy stock market of Brazil has been one of the worst performers in the past one month.

5.    The criticism of cryptocurrencies is weakening and their acceptance is rising by the day. Many harsh critics of cryptoes have softened their stand to conditional criticism. While the opposition to cryptoes use as currency is still strong, their role as store of value is gaining wider acceptance. Obviously, it will have implications for Gold and USD –the two most important conventional ‘store of value’ instruments.

6.    The global investors seem to be losing hope in China now. Till last year the valuation argument was very strong in favor of Chinese equities. No longer is the case. Despite 15yrs of no return, not many are arguing convincingly for Chinese equities now.

7.    The Free Trade Agreement (FTA) between the UK and India may be a positive consequence of Brexit for India. The FTA with Australia has also been signed. India has defended its bilateral trade relations with Russia despite immense global pressures in the wake of ongoing Russia-Ukraine war. Besides, the UN has not taken any significant measures to end the war.

It has to be seen whether we are entering an era of bilateralism at the expense of dissipation of multilateralism. If that be so, the role of the multilateral charters like WTO, UN, IMF etc. will have to be reassessed in the emerging global order.