As we welcome 2014, making a choice between different asset classes is always a tricky affair. Let's make an effort to analyse, which could yield the best returns in 2014.
Equities around the globe rallied in 2013 on the back of easy monetary policies and heavy dose of liquidity injection from the European Central Bank, Japanese Central Bank and the US Federal Reserve. This pushed indices like the Dow Jones, German Dax and other European markets to record highs. Indian stock markets also touched a new record high in 2013, after a wait of five long years.
To expect a more then 10 per cent jump in the Sensex during 2014 would be foolhardy. Indian fundamentals continue to remain weak as inflation remains elevated, interest rates are higher and GDP continues to be way below potential. To compound worries we have an election in the next few months and if the same throws up a hung verdict, God Bless the stock markets.
Also, Indian markets have rallied largely on the back of global liquidity and there are signs that we may not have easy liquidity for long, given that the US has already begun withdrawing its QE3 programme. Any large scale withdrawal is likely to see Indian markets being impacted. If one can get around 10-15 per cent returns from here on, it would be time to exit from stocks.
Gold is most likely to have a steady year, unless there is major geo-political tensions or economic growth around the globe begins to falter, in which case gold could rally. As the US Federal Reserve keeps withdrawing its QE3 programme, gold could fall further.
Clearly, movement of gold would depend on so many external factors. If external factors remain where they are, gold is likely to remain at the same levels.
In fact, one would not be surprised, if gold ends the year without substantial gains or losses. Again, for Indians, much would also depend on how the rupee behaves. If the rupee falls against the dollar, you are likely to get superior returns on gold.
In an election year, debt would be the safest bet. Interest rates in the economy are likely to head lower, and before they do, investors would do well to lock money in safe debt instruments. A decent fixed deposit could fetch you pre-tax returns of around 10 per cent (annual yield), which could be a reasonable proposition. At least, unlike gold and equities, you would not see your capital being eroded. The returns are also very much predictable, unlike the two other asset classes. Also, the RBI may reduce interest rates in the next few months, as inflation would certainly begin to fall, which allows you to lock-in money today at higher rates.