Will stocks outperform bonds?
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His argument, which pertains to the US economy, is not difficult to understand. When there is too much money in the system, it tends to pump up prices of riskier assets. In his words, "When you print money, everything goes up at different times, different asset classes." The interesting part here is that the US economy may actually not do well during this period. In fact, the after-effects of past excesses will inflict a lot of pain on both businesses and consumers.
Unfortunately, the US Fed has only made things worse by postponing pain by recklessly printing money under the garb of the more sophisticated term 'quantitative easing'. Two rounds of money printing have taken place so far and a third round seems pretty much in the offing. With interest rates kept close to zero and sovereign default risks on the rise, putting money in government bonds may not be a great idea after all.
Though Mr Faber's remarks are concerning the US economy, there is an important lesson for Indian investors as well. Let us elaborate our point. The inflationary concerns at home coupled with uncertainty and chaos in the global economy have scared retail investors out of stocks and into safer options like bonds and fixed deposits. At the face of it, returns on these instruments may seem lucrative given that nominal returns are hovering close to double digits. But if you account for the high inflation, your real returns may actually be negative.
At such a time, investing in fundamentally sound stocks that have pricing power would prove to be a lot more rewarding than bonds in the long term.
Do you think stocks will outperform bonds over the next decade? Share your comments with us or post your views on our Facebook page.
01:08 | Chart of the day | |
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Data source: www.livemint.com |
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So far so good but what makes us think that the day of financial reckoning could come as early as next year? Well, it has to do with the various weak links in the global economic chain currently, waiting to snap in unison and real fast at that. Examples that come to mind are high oil prices, US Government debt limit, Euro crisis and the Chinese debt problem. It could even be the conflict between need for greater resources and pollution issues. This list by no means ends here. A lot of other factors can also upset the applecart, thus highlighting the vulnerabilities in the system right now. What makes matters worse is the fact that the book did not take into account debt issues and also the impact that high price of one resource like oil could have on demand for another resource. Thus, the doomsday draws closer and threatens to snowball even more if these factors are taken into account. Clearly, it looks like a dangerous world out there.
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The Indian Railways urgently needs to add freight routes to meet the growing freight traffic in India. Given the cost efficiency of rail transport, the freight traffic is projected to increase by more than 7% annually. Dedicated freight corridors (DFC) will not only meet this growing freight demand, but also decongest the already saturated rail network. We hope that sectors like cement that have been a victim of logistical bottlenecks really benefit from a timely execution of this project.
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04:50 | Today's investing mantra |
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2 Responses to "Will stocks outperform bonds?"
kumar
Oct 28, 2011It is highly acceptable thoughts that investing in equity is always gives better returns. But the question is right stock at right time and right price. I agree that no one is operate the market but participate in the operation of the market. It is true that investing in dept for a long time investment gives more or less same return as equity in addition to safety and secure.
C.P.SHARMA
Oct 28, 2011It may be possible that for a short period (may be a year or so)the bonds out perform stocks, but in long run and cumulatively for a decade stocks will outperform. Absolutely no doubt about that.