Post Covid world may see a meltdown in various asset classes

Currently, all homo-sapiens of the planet Earth are eagerly waiting for an announcement. The announcement of a vaccine which can get this specie rid of Corona virus a.k.a Covid-19. It has created ruckus all across the social, political and economic spectrum in last one year.

From an economic perspective, it is widely speculated that post Covid world could see jump in risk-on asset classes such as Equities due to tremendous amount of money supply in the system and society eagerness to consume goods and services which have been 'on hold' due to Covid. I also 'buy' this theory strongly, though my only deviation is that it may not translate into appreciation of asset classes, even though global economy may continue to improve.

The primary reason behind this view point is that various asset classes such as Equity, Gold and even Fixed Income have already priced in economic recoveries which can happen after Covid. Equity Markets of various countries are trading close to pre-covid levels now. Gold too has been strong on anticipation of low interest rates and weaker USD. So I don't see any other strong trigger for these asset classes to move up as of now.

On the contrary though, I think that Central Banks may attempt to tighten their purse in post Covid era. In this year, Central Banks have expanded their balance sheet to fight economic impact during Covid. There are strong chances that Central Banks may attempt to close this bridge and resume to normal economic measures. If this happens, it will surely impact the liquidity in the market and may turn out to be negative for Equity and Gold.

With Indian economy, the situation is going to be further precarious. Another cause of concern with India is high levels of Inflation. Due to supply disruptions and demand for agri-products, Inflation is at 6 year high at the moment @ 7.66%. With people coming back to normal life, it would further accelerate due to sudden demand of goods and services which got hold due to Covid. This should definitely pinch the inflation and it can go to as high as 10-11%. In this scenario, Reserve Bank of India would have no choice but to either call of rate cuts or at worse increase a bit to match up with rising Inflation. All this more, it is likely to impact Equity markets in India.

Another factor is the resumption of Banking sector operations which right now have been shielded by Central Bank rule of 'not declaring NPAs'. Once commercial banks start declaring actual NPAs in their book, it will surely impact the banking sector and demand for more liquidity.

Summarizing, few risks to asset classes in post Covid era could be as follows:

Well as we say, one must always look at "unexpected than "expected" while making any investments. Hope the vaccine comes quickly and life resumes to normal. But whether investments would also return to normal trajectory or it will take an "un-expected turn" is yet to be seen!

Happy Investing!