The golden rule of investing was challenged in 2022

A simple bank FD enjoyed a neat 5% return, not much lower than equity.
A simple bank FD enjoyed a neat 5% return, not much lower than equity.


The year was topsy-turvy for the world of investing, and the economic uncertainty isn’t going away soon. But old investment rules won’t become irrelevant.

In the world of investing, one dictum is universally accepted: equity earns returns, and debt provides safety. This was challenged in 2022, when both equity and debt prices crashed in advanced economies, leaving investors with no place to hide. India did somewhat better: while the MSCI’s emerging markets and global indices dropped 18.9% and 16.6%, respectively, MSCI India has earned 3.8% so far. Nevertheless, India’s returns were lower than what one would expect for one of the fastest growing economies in the world.

It’s been a topsy-turvy year, as a comparison of holding period returns for various asset classes shows. A classic 60:40 Indian portfolio (60% equity and 40% debt) yielded barely 5.6%, with equity contributing 7.2% and debt 3.1%. Adding gold to the mix pushed it up 5.9%. None of these combinations beat inflation, and each exhibited volatility. In contrast, a simple bank fixed deposit (FD) enjoyed a neat 5% return, not much lower than equity. And as an additional bonus, the FD holder also avoided stock market gyrations—not to mention the heartache of watching bond prices erode with each rate hike!

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In general, returns from equities and bonds do not move together. The exception—as 2022 was—happens when monetary tightening is steep enough to depress bond values as well as equity valuations. India’s benchmark repo rate has gone up by 2.25 percentage points this year, but the resulting drop in liquidity and increase in cost of funds has ensured that the effective tightening in financial conditions is considerably higher.

Top factor

The underlying reason for the global monetary tightening is, of course, inflation. In the decade to 2021, inflation in the US was mostly below its 2% target, while India often experienced spikes beyond its target 4-6% range. As a result, inflation in India was higher by an average of 4%. This relationship flipped in 2022, as prices rose much more steeply in the US, with rising inflation volatility making it even more critical for the Federal Reserve to continue tightening.

Inflation data for October suggest a softening in prices for both India and the US, which has led to market rallies in the expectation of a pause in tightening. In its December monetary policy, the Reserve Bank of India forecast a decline in inflation to 5.4% by the second quarter of 2023-24. If macro conditions evolve towards this outcome, it would boost equity and bond markets.

Slowdown effects

All three of the biggest contributors to world GDP—the US, China and the EU—are expected to slow from their long-term trends in 2023, with some predicting a recession for the US. This will impact India in several ways. A slowdown will hurt exports, which are already under stress. In 2021-22, 40% of India’s exports went to North America and Europe. As production and incomes in these economies slow down, they will cut back on imports of raw materials and finished goods. Risk-averse foreign investors may hold back unless there are sufficient “pull" factors in the form of resilient domestic demand or structural economic reforms. Large-scale tech lay-offs are likely to swell the ranks of the urban unemployed, which may depress salaries and spending. In sum, a global slowdown, which trickles into India via higher unemployment and lower growth, leads to a poor outlook for corporate earnings. This could depress equity returns unless compensated with robust domestic growth.

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Going forward

Economic uncertainty as a theme is likely to dominate 2023 as well. None of the factors that could restore market confidence—a resolution of the Ukraine crisis, a drop in inflation, and the end of monetary tightening—seem close at this point. Rather, recent developments such as the price caps on Russian oil, increased bonhomie between China and West Asia, and rising sovereign defaults among low-income countries have only added to the uncertainty.

This explains why investors are in a wait-and-watch mode. But for the ordinary retail investor, one turbulent year should not call for a rewriting of basic investment rules. A well-diversified and balanced portfolio yields consistent returns over time. Such a portfolio may not deliver the rockstar returns of equity, but it will be more stable than gold, while generating a modest premium over a bank deposit. Diversification is a theme for all years, eventful or not.

Contributed by Deepa Vasudevan, an independent writer in economics and finance.

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