Just like we have different options for travel depending upon season, we have different options for investment too depending upon the macro and micro environment at the stated time.
For example, if it’s a summer time, you would avoid going to a desert and would rather choose a place in mountains. In the same context, investment across various asset classes like equity, bonds, debt, commodities, precious metals, etc also depends upon the existing ecosystem.
A challenging economic environment for equity can be good for bonds and vice versa.
Similarly a challenging bond environment can be good for metals and commodities.
Hence its important that some research can be done before investing. If the time doesn’t allow that, it’s a good idea to at least know about the various vectors.
EQUITY
We should invest in equity when the valuations are supportive of it and the country or the economic environment they operate in, offers growth.
When we talk about valuations, its different for different sectors and can be different for different companies.
Various metrics like P/E, book to value, discounted cash flows, etc can be helpful in taking the decision to invest or not.
Most importantly and above all, focus on earnings of the company as they are the ones which can and will create value for shareholders in the long run.
If a company can deliver compounded growth in earnings consistently, it can justify perhaps any valuation in the medium to long term for its investors.
From a bird eye view, we can look at valuations and if its offer returns for your investment period and is worth the risk, a call can be taken.
BONDS/DEBT
Bonds are financial papers issued by various entities like private and public companies, governments, etc for their money requirements. They pay interest on this in return for which an investor put in his money in this instrument.
This asset class usually offers the lowest risk compared to currency, equities and commodities because here the principal is mostly never a subject of volatility. If we busy a bond with lets say, with an annual interest coupon of 5%, it says that we will get 105% of our investment money after an year. Here the principal doesn’t depreciate and a solvent entity will redeem their bonds after the stated time period.
Bonds are also called debt because it’s a loan they are taking with the promise to pay it back with the agreed interest.
COMMODITIES
Commodities from an investment perspective basically refers to :
- Base metals like steel, copper, aluminium, nickel, zinc, lead, etc.
- Precious metals like Gold and Silver.
- Energy sources like Crude and Natural Gas.
The above usually move in cycles as they are a reflection of the economic environment.
If the economy is growing at a steady pace, the demand for above commodities will be high and will lead to a price increase.
If the macro environment suggest that the cycle of these metals is supportive of the prices going up, we can invest in them.