Effects of Inflation on Stock Returns | Motilal Oswal

Inflation on Stock Returns

The economic scenario is constantly changing and it can be challenging to make investments in such an atmosphere. The current economic environment that has “inflation” written all over it is an especially hard period for investors. So how do investors invest at such a time, specifically if they wish to invest in the stock market? It’s worth going into a brief history lesson first, before you dart ahead to consider opening a Demat account. 

 

History Lessons

With heightened rates of inflation, there is the ever-increasing draw of the upcoming IPO, with startups going public, enticing people to invest. However, it's worth going back in time, in order to get some perspective about previous economic conditions. The previous decade, 2011-2020, represented a low-inflation, moderate growth environment. The earlier decade, primarily the 2002-2007 term, saw higher growth, but increasing inflation. 

 

Currently, we are at a point of low growth and high inflation. This is a phenomenon that is not unlike something the world experienced during the 1970s. Surging geopolitical tension adds to all the uncertainty in the world today. However, in spite of the recent correction in the markets, starting valuations are high. If you want to undertake stock market trading in times of inflation, you can, but with some caution. 

 

The Indian Economic Situation

When an investor wishes to open a Demat account, the intention is to invest and trade in the stock market. Nonetheless, the current state of the economy is in a macro situation and this can be a factor of damage for typical emerging markets. There are many “emerging markets” countries (some closer to India than others) plunging into economic turmoil. As a result of this, there is a redemption by FIIs from such markets. This has been the case with India from October 2021. Yet, compared to countries  in similar circumstances, India is in a better position in the face of inflation. Investors see this as many still seek to do the first thing before investing in the stock market, that is, open a Demat account.  

 

Stock Market Trading with Investor Awareness

Why is India strong as an investment market, even though that investment may be in the stock market? The reasons are quite a few. For one thing, economic activities in India have resumed with force, post all the scars of the past few years. The sector of services, which has been dragging its feet for the past couple of years, is showing signs of revival too. Furthermore, levels of external debt are low, Forex reserves are solid and appropriate enough to meet CAD projections and external payments of debt. In this environment, investors who invest in stocks must be circumspect as the investment in the markets warrant caution. The following factors should be kept in mind if investors wish to open a Demat account and follow methods of robust stock investment during inflation periods:  

 

  • Investors must brace for heightened volatility, lasting for 6 to 9 months more.
  • Investors should keep expectations of returns low, and not expect a repetition of the returns of the past two years.
  • If investors wish to invest lumpsum amounts, they can choose funds with balanced advantages, balancing allocations between debt and equities. 
  • Investors who are conservative should choose hybrid funds. 
  • Over the next 6 months to 9 months, investments in small and mid cap classes should be made in a staggered way, via the route of an STP or SIP. 

 

A Time for Careful Investment

With many an upcoming IPO to catch your investment attention, you may be drawn to invest in the stock market. It's easy to open a Demat account and start investing, but if you do so now, it is certain that you have to do your research about stocks and invest with care.  

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

 

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