Every difficulty comes with an opportunity to benefit if you are alert. The current meltdown in the financial markets is another such opportunity for a massive gain.
Financial markets have witnessed major price erosion with stocks, cryptos, and almost every financial asset heading lower.
As inflation is rising fast and furious, it is destroying the purchasing power of individuals. Fixed income instruments like bank fixed deposits fail to beat the effect of inflation.
So far, central banks of the world responded with rate hikes, but this is igniting the fear of slow economic growth, even recession, as the economies are still suffering from various challenges. In some economies like the US, recession fears are paramount.
A recession in the US is likely to affect all economies. For example, our IT services export may suffer in such a scenario. And if foreign investors sell Indian assets to shift money to the US, it can devalue Indian Rupee. Imports will be costlier in such a situation.
Surely, there is a clear and present danger.
However, you can benefit from this dire situation if you take certain steps. We will discuss those steps as we continue.
But before that, let us understand the monster called inflation in greater detail.
How Inflation Devalues Your Assets and Income
A little inflation is good, say the economists, as it stimulates growth. But high inflation harms the economy as much as it damages individual financial health.
Persistent high inflation is outright poison for the economy.
You know how it affects you when you have to shell out more for your groceries, gas, petrol, and almost every product you regularly consume. As income rarely keeps pace with inflation, your savings amount decreases its value.
Another problem is that the value of your savings decreases with high inflation. To offset this, you need to save more but it is easier said than done.
In the broader perspective, depressed consumer demand reduces lower tax collection for the government. It may affect infrastructure spending by the government in a big way.
There are myriad ways inflation affects the economy.
For example, the price of the home you want to buy continues to increase because of higher prices of building materials.
Inflation can ravage an economy, and decrease the trust of citizens in the government. Potentially, it can also start civil unrest beyond a point. Therefore, governments are wary of inflation while central banks take out their monetary weapons to control the monster.
This time also, a rate hike is the first response of central banks across the world. Higher interest rates are expected to lessen the amount of cash in the economy. This might help control inflation.
Why is Inflation So Vehement Now?
Inflation is very forceful this time because of a variety of reasons. The ongoing Russia-Ukraine war. Supply chain disruption. High raw material prices. And to top it off, all central banks pumped huge amounts of cash into the economy to tide over the damaging effect of Covid.
Never in the past, did the world face back-to-back challenges of a debilitating global pandemic followed by a European war. The world’s production powerhouse, China, is still affected by Covid.
Contrary to the earlier expectations that the war would end soon, war ravages on. The world is yet to get over the supply chain disruption. It seems that this will take time to fix.
Raw material prices are stabilizing now. However, energy prices are still at a very high level.
Central banks are now withdrawing cash from the economies. Almost every central bank is hiking interest rates.
Let us understand that economies are cyclical. After a period of high growth, economies get overheated. Then slowdown comes and eliminates euphoria and recklessness from the system.
This has played out over and over, and over.
Will Recession Hit India?
A recession is defined as two consecutive quarters of negative economic growth.
Although growth expectations of the Indian economy have been somewhat moderated by economy watchers recently, it is still extremely robust. There is hardly any chance of recession affecting India.
However, the economic slowdown can occur in some sectors.
What are the Ways to Navigate this Period?
One of the most important ways is to adopt a more frugal lifestyle. Especially postpone the purchase of luxury items.
Maybe it is the right time to monetize your hobby. Write that recipe book you have been postponing. Or start a side hustle.
This is the time when you should diversify your investments. Almost all stock markets are looking at a long period of consolidation. Cryptos are in a deep bear market and should be avoided now.
While financial assets are not expected to offer good returns, real estate is predicted to do exceptionally well.
It is going to appreciate because of higher raw material prices. Money flow is shooting up in the sector as other sectors are hardly promising decent returns.
This is the time to diversify your investments with a focus on real assets like properties.
As time goes by, property prices almost certainly will rise. This can be a strain on your budget. The amount of down payment will definitely increase. It may affect your home loan eligibility also.
Property Demand is Soaring
Even if property prices are going up, property demand is not diminishing in India.
Homebuyers are scrambling to buy properties now that the pandemic is over. Demand for properties has gone up by as much as 40% in the first 3 months of this year.
A highly respected industry veteran, Mr. Deepak Parekh, Chairman, HDFC, has stated that he has not seen such robust demand for affordable properties in his career.
In such a scenario of lofty demand, elevated raw material prices, and escalating finance costs because of higher interest rates, there is every chance that property prices will continue to go up.
You will be glad to see the price of your property appreciating, even if there is some slowdown in other asset classes.
Will EMIs become Unmanageable?
Although the days of ultra-low interest rates are over, RBI is wary of hiking rates too high too fast. There is a fear that such a step can derail the still-fragile economy.
Even the US Fed, as well as other central banks, are being extremely cautious in this respect.
Although interest rates will most likely rise going forward, they will rise slowly over a long period of time. This will not create any sudden strain on homebuyers as EMIs will rise in a graded manner.
The good news is that retail inflation climbed down in May from the high of April. It gave RBI some maneuverability with respect to the rates.
It is almost certain that property price appreciation will be higher than the interest outgo, offering a higher return on investment to the homebuyers.
There is hardly any convincing logic in waiting to buy properties.
Buy your dream home now.