Where to invest your money in a volatile economy?

The global economy will experience a bumpy ride and Pakistan’s volatile economy will only exacerbate the situation

They say there are decades when nothing happens and weeks when decades happen. We’re certainly living through these weeks at the moment with Russia’s invasion of Ukraine, inflation spiraling out of control across the world and oil prices putting Pakistani consumers in a tight squeeze. Moreover, the US is hiking interest rates and the era of easy money is about to come to an end. If the FED doesn’t manage this well, it could even spark a global recession. And all this is happening before we even account for the political instability we may experience in Pakistan if the no-confidence motion against Imran Khan succeeds.

So, what are the macro-economic trends to watch out for because of Russia’s invasion of Ukraine and how could they impact your wallet? While Russia is a sizable economy, the contagion effect of a Russian collapse is relatively limited. Where we will see an impact is on commodity pricing on items like wheat and oil. This means rising import bills for Pakistan. Moreover, as the US raises interest rates to slow inflation, this will reduce demand and economic activity in America and around the world. This could negatively impact Pakistan’s export earnings and remittances and when you couple this with rising commodity prices, Pakistan will not just see rising inflation but also a depreciation of our currency, which will spike inflation even further.

This macroeconomic context will also impact an emerging area of opportunity for Pakistan i.e. start-ups. In the last few years, the global financial system has been flush with liquidity and inflation and borrowing rates have been low, which has fueled a bubble like frenzy when it comes to start-up valuations and fundraising. As venture capitalists enhanced their risk appetite while chasing higher returns, they even entered frontier markets like Pakistan. But with interest rates rising and easy money drying up, valuations — particularly for non-profitable growth businesses — will begin coming down. Beyond the economic impact, this will also challenge a social revolution currently underway in Pakistan. Ten years ago, Pakistani graduates from top universities wanted to join multi-national companies. Today, they want to get into start-ups. How will this change, as start-up valuations come down and fundraising becomes harder? It’ll be painful to watch.

So, where should you invest your money in such a volatile, inflationary economy? While most asset classes can be dangerous and volatile in these circumstances, we know that you’ll lose out holding cash in such a high inflationary landscape, especially with further depreciation coming. If you want to hold cash, as much as I hate to say it, hold your cash in dollars. Next, over the long term we know equity markets pay out historically, even if they’re volatile in the short term. But instead of chasing high growth or tech stocks, you want to pick up strong companies, with solid, sustainable cash flows. Gold is another safe haven in volatile times. Crypto could swing either way but with easy money drying up, most experts argue Crypto isn’t a great place to enter right now, if you aren’t a player already.

Another all-time favourite for Pakistanis is real estate. Inflation and devaluation are actually great periods to hold real assets in, even though they’re a non-productive investment for our society and economy more broadly. Moreover, as inflation rises, your rental income from real estate will also rise, giving you a better rate of return. For a host of peculiar reasons, cars, which are a depreciating, real asset around the world actually appreciate in Pakistan so if you have a genuine need for a car, it’s actually a good store of money too. In an ironic twist, cars have also become an appreciating asset in the US now because of supply chain constraints.

Finally, keep enough cash or liquid assets in hand to keep you afloat for at least six months of expenses in case you lose your job. The global economy is going to experience a bumpy ride over the next six months and Pakistan’s naturally volatile economy will only exacerbate the situation.

Published in The Express Tribune, March 20^th, 2022.

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