Reality Scores Over Sentiments

 

     

         Reality Scores Over Sentiments

Global Scenario:

I believe 2025 will be a year of navigating turbulence rather than one of rapid GDP growth. Global economic expansion is expected to remain subdued, with the U.S. projected to grow at a modest 2.0%, the Eurozone lagging at 0.9%, and China’s growth forecast at 4.2%—well below its historical average.

Persistent inflation, fuelled by higher fiscal spending and potential tariff hikes, may limit central banks' ability to cut interest rates as they strive to balance growth and inflation control.

A few months into 2025, the sharp decline in the U.S. stock market has prompted leading Wall Street analysts to revise their bullish outlook for the S&P 500. Heightened uncertainty around President Donald Trump’s evolving tariff policies and retaliatory measures from trading partners have triggered fears of an escalating global trade war, leading to increased market volatility.

As of March 17, 2025, Wall Street’s revised year-end target for the S&P 500 is 6,667, implying a 17% advance from its current level of 5,675 (Source: MarketWatch).

The shift in Wall Street’s sentiment marks a sharp departure from late 2024, when strategists expected the market to sustain its upward trajectory following two strong years. Initially, hopes were pinned on Trump’s "pro-growth" agenda, promising tax cuts and deregulation. However, tangible policy action remains elusive, with attention largely focused on tariffs, immigration curbs, and fiscal downsizing.

Geopolitical & Policy Risks: 

The uncertainty surrounding trade policy could drive increased market volatility in 2025-26. A key trend to watch is the global shift in economic strategy—from monetary policy to fiscal policy, as governments seek new drivers of growth. With inflation still above comfort levels, central banks have limited flexibility, making fiscal measures the next battleground for economic expansion.

Indian Economy and Equity Market:

2025 has been challenging for Indian equities, marked by persistent FII selling and a steep market correction. Several factors have contributed to this downturn:

• Rupee depreciation
• High market valuations
• Earnings slowdown
• Strong dollar and rising U.S. bond yields

1)    Impact of U.S. Macros on Indian Markets : The U.S. bond yield surge is a key headwind. The 10-year U.S. Treasury yield has climbed above 4.3%, narrowing the spread between U.S. and Indian sovereign bonds to 2.24%, down from over 5% in 2022. A stronger dollar index (103 as of March 17, 2025) has led to sustained FII outflows, further pressuring the Indian market.

The big question: Why should FIIs invest in a high-valuation Indian market when U.S. bonds offer a risk-free return of 4.5%?

2)  Valuation Concerns: At Nifty 22,500, the Indian market is trading at 20x FY26 estimated earnings, well above the long-term average of 18x. Given the resilience of the U.S. economy and the relative affordability of other emerging markets, FIIs may continue to reduce exposure to Indian equities.

3)    India’s Long-Term Growth Potential: Despite near-term headwinds, India's economic trajectory remains compelling:

• IMF projects India’s GDP to grow at an average of 6.1% over the next five years, making it the world's third-largest economy by 2027 after the U.S. and China.
• The economy is expected to double from $3.5 trillion to $7 trillion by 2030.
• India’s manufacturing sector needs to transition from import substitution to export-led growth to sustain this momentum.
• However, a slower-than-expected global recovery and geopolitical disruptions could weigh on India’s export outlook. To counter this, India must harness its domestic strengths to drive sustainable growth.

4)   The Role of Capital Markets & Policy: India's capital markets play a critical role in channeling savings into investments, ensuring financial stability, and boosting investor confidence. However, while domestic institutional investors (DIIs) have cushioned the impact of FII outflows, they may not be able to fully counterbalance prolonged foreign selling.

Fiscal policy will be crucial in shaping India's economic trajectory. The government must:

• Balance fiscal discipline with growth-oriented spending
• Prioritize capital expenditure in key infrastructure projects
• Encourage state governments to efficiently utilize allocated funds

5)  India’s Near-Term Outlook:  India’s GDP is expected to grow between 6.7% and 7.3% in FY 2025-26, albeit with downside risks. Key challenges include:

• Geopolitical uncertainties impacting trade and supply chains
• Delayed global recovery affecting exports
• Inflation concerns, although expected to moderate with a strong agricultural output and proactive policy measures

Despite these risks, India's GDP gap versus pre-COVID-19 levels is closing, and the economy is gradually regaining momentum.

Investment Strategy for Indian Equity Markets:

1. I personally believe that India has bottomed out, and economic growth will accelerate over the next six months. Additionally, Donald Trump’s policies are likely to stabilize, reducing global market uncertainty.
2. Investors should consider deploying capital in tranches, strategically buying equities with every 5 % market decline to position themselves ahead of the recovery.
3. The approach should focus on bottom-up stock picking, prioritizing strong fundamentals over purely technical indicators, while also factoring in macro-economic trends.
4. In these uncertain times, smart and informed investing will be crucial. A well-researched, fundamentals-driven strategy can help investors navigate volatility and build capacity for strong returns over a one-year horizon.

Author
Thakur Ajit Singh
Founder - Quick Turtle | Graded Financial Services | AskCred
Financial Expert | Trainer | Management & Placement Consultant

Cell: 8169810833

Ways to Invest in Precious Metals: Gold & Silver

Ways to Invest in Precious Metals: Gold & Silver

In times of economic turmoil, precious metals (gold, silver) tend to retain their value or even appreciate. It is for this reason that they are so attractive as investment options as they provide a buffer to an equity-debt portfolio, as well as appreciate over time.

Unlike gold, silver has immense technical and industrial uses as it is an excellent thermal and electrical conductor. It is widely used in specialist electronics and solar panels. Its anti-bacterial properties also make it popular in the medical industry. Less than 10% of the gold mined is used for industrial purposes, but in the case of silver the number is 50%. These applications create a fundamental demand for silver, the intensity differing over various economic cycles with higher demand during boom times.

Investors can diversify by investing atleast 10% of their portfolios in low-risk assets like silver, gold, etc. This will reduce the overall risk exposure in their investment portfolio. 

GOLD

1. Physical Gold:
The price of physical gold varies by geography. It’s a traditional method of investment, but storing and insuring physical gold can be cumbersome and costly.

2. Gold ETFs (Exchange-Traded Funds):
Gold ETFs are financial instruments that hold gold bars, with each share representing a portion of that gold. These ETFs invest in gold bullion or futures, with prices that closely track the price of gold, although minor deviations due to tracking errors may occur.

• Advantages: Gold ETFs are more transparent, liquid, and closely aligned with market prices than physical gold. They can be bought and sold online and held in Demat form. One unit of a Gold ETF typically equals one gram of gold. They also have lower costs, with annual charges including brokerage and an expense ratio ranging from 0.50% to 1.00%.
• Taxation: Earnings from ETFs are taxed according to the investor's income tax slab, irrespective of the holding period.
• Liquidity: Gold ETFs are highly liquid and can be traded freely without a lock-in period, making them suitable for short, medium, or long-term investment objectives.
• Purity: 0.999 purity gold bullion is the underlying asset of gold ETFs.

3. Gold Mutual Funds:
Gold mutual funds are open-ended funds that invest directly or indirectly in gold assets. Unlike Gold ETFs, the value of one unit in a gold mutual fund doesn’t correspond to one gram of gold.

• Investment Method: You can invest in gold mutual funds through SIPs (Systematic Investment Plans) starting from as low as Rs. 500, or via a lump sum. The returns are linked to the performance of physical gold, gold ETFs, or gold-related securities.
• Types: Examples include gold mining funds and gold funds of funds (FoFs). Gold FoFs invest in units of Gold ETFs, and you don't need a Demat account to invest.
• Costs: Gold mutual funds have an annual expense ratio between 0.6% and 1.2%, which includes management fees and ETF fees. Redeeming gold mutual funds within a year may incur an exit load of 1-2%.
• Liquidity: Gold mutual funds are more liquid than Gold ETFs in India, as they can be quickly bought or sold.

 

 

 

Comparison: Gold ETF vs. Gold Mutual Fund

4. Sovereign Gold Bonds (SGBs):
SGBs are government-backed securities denominated in grams of gold. Investors pay cash for the issue price and hold the bonds for a specific period. Upon maturity, the bonds can be redeemed for cash equivalent to the prevailing gold price.

• Interest: SGBs offer a fixed interest rate of 2.50% per annum, which is tax-free if held until maturity.
• Purity: The issue of sovereign bonds is based on 24 carat gold price of 99.9% purity gold. 
• Security: SGBs are a digital asset stored in a Demat account, eliminating the risk of theft.
• Lock-In Period: SGBs have a lock-in period after which they can be redeemed. The redemption price is based on the average closing price of gold (99.9% purity) 3- days prior to the redemption date.
• Minimum Investment: The minimum investment in SGBs is one gram of gold.

Unlike physical gold, SGBs do not carry the risk of theft and are a more secure and tax-efficient way to invest in gold digitally.

Silver ETF

Investment Exposure:

A Silver ETF is an exchange traded fund, listed on the National Stock (NSE) Exchange and Bombay Stock Exchange (BSE). The ETF invests in 99.9% purity physical silver and may also participate in Exchange Traded Commodity Derivatives (ETCDs) with silver as the underlying commodity. These ETF units are held in a demat account. So, one can buy, sell or trade these units at ease during any time of the trading hours just like stocks.

Silver ETFs track the spot price of silver in the open markets. Fluctuations in the price of silver will change the NAV of these ETFs. Each unit of a silver ETF represents 1 gram of physical silver and is stored in a secure vault by the Asset Management Company. 

The fund managers must obtain auditor reports on physical verification of the silver stored in vaults at regular intervals.

 

Features of Silver ETFs

·       Purity: The underlying of silver ETFs is 0.999 purity silver bullion. 

·       Taxation: Silver is a capital asset. An individual’s investment in bullion attracts long-term capital gains tax if held for more than 36 months. In such a case, gains from silver are considered taxed at a flat rate of 20%.

However, if the investor’s holding is for less than 3 years or 36 months, profits are treated as short-term capital gains and are added to the regular income, which is taxed as per the respective tax slab.

·       Tracking Error: Tracking error is the difference between the returns of a scheme and that of an underlying benchmark. Fund houses must keep their tracking error within a range of 2%. If it exceeds 2%, the fund houses must mention tracking error percentage on their portal.

·       Expense Ratio:

SEBI has mandated that fund houses cannot charge more than 1% of the Silver ETF scheme’s assets under management as the expense ratio.

 

Gold ETF vs. Silver ETF: Where Should You Invest?

If you’re more conservative investor with a low appetite for risk, consider investing in gold ETFs due to their relatively stable nature. For more risk-aggressive investor with a high tolerance for volatility, silver ETFs is a choice.  

Author
Thakur Ajit Singh
Founder - Quick Turtle | Graded Financial Services | AskCred
Financial Expert | Trainer | Management & Placement Consultant

 

Avoiding - Mid-Life Economic Crisis for India

 

Avoiding - Mid-Life Economic Crisis for India

The term "middle-income trap" has become increasingly common among policymakers to describe middle-income economies that seem unable to transition to high-income status. This concept, discussed in the World Development Report 2024, highlights that countries often hit a "trap" at about 10% of annual U.S. GDP per person, around $8,000 today. As of 2024, India's GDP per capita is $2,731 (nominal), and its GNI per capita is $10,123 (PPP).

Understanding the Middle-Income Trap:

According to the World Bank, lower middle-income economies have a GNI per capita between $1,136 and $4,465, while upper middle-income economies fall between $4,466 and $13,845. High-income economies have a GNI per capita above $13,846. Over the past 70 years, many low-income countries have rapidly developed, lifting millions out of poverty. However, only a few have achieved high-income status, with income growth often being variable and volatile.

In recent years, policymakers in slower-growing middle-income countries have focused on the middle-income trap. While its existence is debated, the concept encourages a reassessment of strategies once traditional growth sources diminish. Middle-income countries must drive productivity, innovation, and competitiveness while strengthening economic fundamentals to foster and stabilize growth. Achieving high-income status is challenging and prone to growth slowdowns, but stagnation is not inevitable.

Origins and Evidence of the Middle-Income Trap:

The middle-income trap was first described by Indermit Gill and Homi Kharas, noting that regions like Latin America and the Middle East often experience slowdowns after rapid growth from low to middle income. This growth, driven by cheap labour and basic technology catch-up, eventually loses momentum as wages rise and the rural labour force shrinks. Without new growth sources, countries struggle to compete with low-wage or high-innovation economies.

Empirical evidence from Latin America and the Middle East supports the middle-income trap, with many economies remaining at middle-income levels for decades. Of the 101 middle-income countries in 1960, only 13 became high-income by 2008. Research shows that growth slowdowns are more likely at middle-income levels, particularly around per capita incomes of $10,000-$11,000 and $15,000-$16,000 (PPP-adjusted). Some models suggest low-productivity equilibria in middle-income countries, characterized by low shares of skilled workers.

However, other evidence questions the trap's existence. Many countries have seen steady income growth since 1960, and the transition from middle to high income does not take longer than other transitions. Historical evidence shows economies move up across income groups, with those achieving high-income status experiencing faster growth even at lower income levels.

Avoiding the Middle-Income Trap:

The World Development Report 2024 outlines strategies for developing economies to avoid the middle-income trap. Lower-middle-income countries must adopt modern technologies and business practices, while upper-middle-income countries need to push the global frontiers of technology. This requires reconfiguring economic structures to enable greater economic freedom, social mobility, and political contestability.

Today, 108 countries are classified as middle-income, housing 6 billion people. Since the 1990s, only 34 middle-income economies have attained high-income status, accounting for less than 250 million people. The median income per capita of middle-income countries has never risen above 10% of the US level. Climbing to high-income status will be harder due to high debt, aging populations, and growing protectionism.

The "3i strategy" recommended by the World Development Report 2024 includes:

1)     Investment: Low-income countries should focus on increasing investment.

2)     Infusion: Lower-middle-income countries need to adopt modern technologies and business practices.

3)     Innovation: Upper-middle-income countries must drive innovation and push technological frontiers.

 

Key Actions for Middle-Income Countries:

1)     Discipline Vested Interests: Implement competition regimes to encourage new entrants and prevent large corporations from stifling growth.

2)     Reward Merit: Accumulate and allocate talent efficiently, enhancing the use of skilled workers.

3)     Capitalize on Crises: Use crises as opportunities for tough policy reforms, focusing on energy efficiency and emissions reduction.

 

Conclusion:

For India to escape the middle-income trap and achieve high-income status, it must transition from a trading economy to a manufacturing one with a prime focus on exports. Emphasizing research, innovation, and technological development is crucial. Additionally, designing an education system that is industry-centric while preserving cultural values will support this transformation.

 

The Perfect Blend in Investing

The Perfect Blend in Investing

Dear Investors,

Direct Equity Investment is not for the investors juggling busy schedules and lacking in-depth market knowledge, navigating the investment landscape can be overwhelming.

Enter professionally managed funds like Mutual Funds (MF), Portfolio Management Services (PMS), and Alternate Investment Funds (AIF), offering a streamlined approach to diversified investing.

Challenges for Investors:

Identifying the right funds amidst the multitude of options can be daunting (there are 2500 Mutual Fund Schemes, 324 PMS schemes, 1088 schemes in AIF in India), requiring extensive research across various asset classes. Seeking guidance from experienced investment consultants like 'GRADED FINANCIAL SERVICES', whose founders come with collective experience of 60 years while operating in the space of Stock Broking, Wealth Management, Banking, Insurance, Forex and Investment Banking, can ease this burden.

1)    Mutual Fund (MF):

MFs pool resources from investors to access a range of investment opportunities, from equities to bonds and more.

Benefits include risk diversification, affordability, liquidity, low expense ratios, and tax efficiency.

The minimum amount required to invest in mutual funds is Rs. 100/- for the Lumpsum and Rs. 500/- through SIP (Systematic Investment Plan).

 

2)   Portfolio Management Services (PMS):

PMS offers tailored investment solutions for High-Net-Worth Individuals (HNIs), providing access to diverse asset classes viz. mix of stocks, fixed income, commodities, real estate, other structured products, and cash

Unlike mutual funds, PMS offers flexibility in exposure and fee structures based on performance.

The minimum amount required to invest in PMS is Rs.50 Lac.

 

3)   Alternate Investment Fund (AIF):

It is a privately pooled investment vehicle that invests in alternative asset classes such as - private equity, venture capital, SMEs, debt funds, Private Investment in Public Equity Fund (PIPE), hedge funds, real estate, commodities, and derivatives.

AIFs may offer higher returns than traditional investments due to their exposure to a broader range of assets and investment strategies. However, this higher return also comes with higher risk.

The minimum investment amount for investors is Rs. 1 crore.

(AIF) Taxation:

Tax implications vary across AIF categories, with Category I and II enjoying pass-through status (taxed at the hands of investors), while in case of Category III the income earned will be taxable in the hands of the fund.

 

Suggestions:

Personalized investment strategies based on financial goals and investment capacity, combining MFs, PMS, and AIFs for optimal diversification and risk management.

For Example: 

1) Invest less than Rs.1 Crore:  in highly rated (evaluated based on 7 – vital parameters of selection) MFs, diversified in equal amount amongst Top Rated Large, Mid, Small, Multicap, Hybrid, and Index Funds.

2) To Invest Rs. 1 Crore: Rs. 50 Lac in MFs (as explained in above point number 1) and Rs. 50 Lac in Highly rated PMS.

3) To Invest Rs. 2 Crore: Rs. 50 Lac in MFs (as explained in above point number 1), Rs. 50 Lac in highly rated PMS, and Rs. 1 Crore in hghly rated AIF.

4) To invest over Rs. 2 Crore: Follow above sequence from point 1 to 3.

Conclusion:

The Blend of MF, PMS, AIF would offer wonderful opportunities to the investors to take exposures, vide diversification across asset classes, market caps, executed under different proven strategies of investing by an experienced Fund Managers.

However, sound subject knowledge, capability to do risk assessment, and make right choices of funds /schemes by the investors would make all the difference, as the funds come with varying degree of complexities, risk and corpus requirement.

 

Committed to your financial well-being.

Warm Regards

Thakur Ajit Singh

Founder - Quick Turtle | Graded Financial Services | AskCred

Financial Expert | Trainer | Management & Placement Consultant

Cell: 8169810833

 

A Landmark : India's Inclusion in Bond Index

 

Dear Investors,

A significant milestone has been achieved by the Indian bond market with its inclusion in the JP Morgan’s widely tracked Government Bond Index-Emerging Markets (GBI-EM). This development marks a transformative moment in the landscape of global finance, with far-reaching implications for investors, policymakers, and market participants alike.

As India continues to position itself as a key player in the global economy, the inclusion in the bond index serves as a testament to its growing significance on the world stage. This stride of India, is  poised to provide a substantial boost to the Indian Rupee (INR) and its international standing.

The long-term implications of this development are noteworthy. India's bond yields currently enjoy a significant advantage over those of its counterparts in the US and China. With India's 10-year government bonds yielding at 7.2 per cent compared to 4.5 per cent in the US and 2.7 per cent in China, the attractiveness of Indian bonds to global investors is likely to grow substantially.

Moreover, despite being a large and liquid market, Indian bonds have historically been absent from major global or emerging market indices. Therefore, JPMorgan's decision to include Indian bonds in its index is not only a significant validation of India's bond market maturity but also paves the way for increased global participation.

During the inclusion period, it is anticipated that the Indian bond market will witness a substantial influx of capital, with estimates suggesting inflows of USD 23-30 billion. This infusion of capital will not only deepen the liquidity of the Indian bond market but also, provide new avenues for investors to diversify their portfolios.

It is also worth noting that India's bonds are being considered for inclusion in other major indices, such as the FTSE Emerging Markets Government Bond Index, further underscoring the growing recognition of India as a key player in the global financial markets.

In conclusion, the inclusion of Indian bonds in the index represents a significant step forward for the Indian bond market and reaffirms the value that this asset class brings to a diversified global portfolio. This landmark development highlights India's growing importance in the global financial landscape and sets the stage for increased international investment in Indian debt securities.

Author:

Thakur Ajit Singh

Quick Turtle | Graded Financial Services | AskCred.

Management Consultant | Trainer 

The Diamond – A Timeless Asset in Portfolio

 

The Diamond – A Timeless Asset in Portfolio

The sentiment of diamonds being considered "investment pieces"; seldom echoes through occasions like engagement rings, Van Cleef necklaces, or milestone gifts such as a Cartier Love bracelet. While these acquisitions may seem exclusive to the privileged, their allure extends to all as timeless, cross-generational, family heirlooms that endure the test of time. Beyond sentimental value, investing in diamonds deserves recognition as a crucial element in marking life's significant milestones.

A seemingly modest 2 or 3-gram high-quality diamond can hold a value equivalent to 100 kilos of gold. This remarkable combination of value and portability positions diamonds as a potential form of emergency funding. Throughout history, populations displaced by war or extreme upheavals have successfully utilized diamonds as a portable and reliable asset in times of crisis.

Diamond Producers:

Diamonds are distributed across more than 35 countries globally. The primary contributors to diamond production are Africa and Russia, which collectively account for a significant share of the world's diamond output. Africa, in particular, is home to numerous diamond mines and plays a central role in the global diamond industry.

Canada and Australia are also significant players in the diamond production landscape. Both countries have made substantial contributions to the global diamond market, with mining operations that yield high-quality diamonds. Canada, in particular, has become renowned for its ethically sourced diamonds and is a key player in the industry. Regions in the Americas are also actively involved in diamond production. Brazil, in particular, has emerged as a smaller but noteworthy source of diamonds.

Diamond Characteristics:

Diamond, a solid form of carbon, exhibits a crystal structure known as diamond cubic, endowing it with the highest hardness and thermal conductivity among natural materials. The extreme rigidity of the diamond's atomic arrangement  exposes it to contamination by few types of impurities, with exceptions like boron and nitrogen. Infrequent defects or impurities, occurring at about one per million lattice atoms, impart colors such as Blue (Boron), Yellow (Nitrogen), Brown (Defects), Green (radiation exposure), Purple, Pink, Orange, or Red. Additionally, diamond boasts a remarkably high refractive index and relatively high optical dispersion, contributing to its unique and captivating visual properties.

Classification of Diamonds:

Diamonds can be broadly classified into two main categories: (1) Natural Diamonds and (2) Synthetic Diamonds.

Natural diamonds are those formed through natural processes or events. The majority of natural diamonds boast ages ranging from 1 billion to 3.5 billion years, originating at depths between 150 and 250 kilometers (93 and 155 miles) within the Earth's mantle.

On the other hand, Synthetic diamonds can be cultivated either from high-purity carbon under high pressures and temperatures or from hydrocarbon gases through chemical vapor deposition (CVD).

Additionally, Imitation diamonds can be crafted from materials such as cubic zirconia and silicon carbide.

Distinguishing between natural, synthetic, and imitation diamonds is commonly achieved through optical techniques or measurements of thermal conductivity. This classification not only highlights the diverse origins of diamonds but also underscores the importance of accurate identification in the diamond market.

The 4Cs of Diamonds:

Diamonds are assessed based on four key criteria, commonly known as the 4Cs, which play a pivotal role in determining their quality and price: Carat, Color, Clarity, and Cut.

Carat: Carat measures the weight of the diamond, with one carat equivalent to 0.2 grams. This metric is integral to the overall value of the diamond, influencing its price and highlighting its rarity. It's crucial to note that carat weight is distinct from diamond size, as different gem materials can have varying densities.

Color: The color of a diamond indicates whether it is naturally clear or exhibits a different color. Generally, the rarer the color, the higher the diamond's value.

Clarity: Clarity refers to any imperfections that may detract from the visual appeal of the diamond. Blemishes and inclusions are factors that reduce a diamond's clarity score.

Cut: Cut refers to the style or design used in shaping a diamond and encompasses symmetry, proportioning, and polish. Each diamond is unique, making them exceptional investment assets. The cut, with its unique facets, influences how much the diamond sparkles or reflects light, consequently impacting its price. To assess quality, diamonds are evaluated based on symmetry, polish, brilliance, and fire, categorized as poor, fair, good, very good, and excellent. Poorly cut diamonds may appear dull, significantly decreasing their value.

Diamonds possess high value density, allowing for easy transportation at a fraction of the cost of precious metals. The diamonds within a Diamond Standard Bar and Coin, for instance, are valued at around $1 million per ounce. However, value density varies among diamonds; for instance, a 1-carat Red diamond may be more value-dense than a 1-carat White diamond due to the rarity of Red diamonds. Diamond Standard's efforts to standardize diamond commodities enable investors to bridge the value gap by acquiring fungible Coins and Bars. This standardization helps eliminate disparities in diamond value, providing a more equitable investment platform.

An Underallocated Investment with Pent-Up Demand:

Investors currently maintain a significant presence in various precious metal markets, with substantial allocations of approximately 30% in the gold market, 19% in the silver market, 17% in the platinum market, and 15% in the palladium market. In stark contrast, the diamond market remains notably underallocated to investors, constituting only around 1% of their portfolios.

The underwhelming investment in diamonds, despite their well-established reputation as one of the most sought-after and valuable precious resources, becomes particularly perplexing when considering the substantial allocations in other precious metals. The lack of awareness regarding standardization issues further complicates this scenario, making it challenging for investors to tap into the diamond market. Each diamond's unique characteristics and individual price tags, in the absence of standardization, create a hazy path to liquidity.

The absence of a streamlined market structure  has hindered diamond price discovery and transparency, deterring potential investors from entering the market. Efforts to establish organized exchanges and market standards could potentially unlock the pent-up demand for diamonds and bring about a more robust and accessible investment avenue.

An Uncorrelated Asset for Portfolio Diversification:

Diversification stands as a cornerstone for risk mitigation within any investor's portfolio. By holding assets with low correlations, investors can effectively reduce portfolio risk. The correlation between two assets directly influences the resulting portfolio volatility, making it essential for savvy investors to maintain a diverse mix of assets with low or negative correlations. This strategic approach maximizes returns for a given level of non-diversifiable or systematic risk.

Diamonds emerge as a unique and uncorrelated asset class, exhibiting low correlations relative to multiple other asset classes. This characteristic suggests that diamond prices are influenced by independent drivers different from those affecting more frequently traded assets. The potential benefits of adding diamonds to a diversified portfolio become evident in the lower volatility they may contribute, given their distinct market dynamics.

However, it is important to note that the correlation of diamonds may experience changes, particularly with an anticipated increase in investor holdings. The advent of standardized and regulated diamond investments, coupled with a growing acceptance of diamonds as an asset class, could lead to an increase in correlation. Investments tied to diamonds, such as commodities, futures, options, private funds, exchange-traded funds, and commodity indices, may link a portion of their market price performance to overall demand for assets and securities. Consequently, heightened periods of market volatility could contribute to an increase in correlations between diamond investments and other assets.

Among the various diamond indices, the 1.0 carat mixed diamond index has shown the most effective risk-reducing performance. The construction of these indices considered different weights (0.3, 0.5, and 1.0 carats) and quality classifications (fine, commercial, and mixed) to reflect the diverse grades and applications of diamonds within each class. Investment-grade diamonds are further categorized into three size groups (0.3, 0.5, and 1.0 carats) and then classified by color and clarity.

Only colorless or near-colorless diamonds (grades E, F, and G) and specific clarity grades (VVS1, VVS2, and VS1) were used for these indices, with the rarity of apex clarity grades (FL and IF) and color grade D warranting a separate grouping. This meticulous categorization ensures a nuanced approach to including diamonds in investment portfolios, recognizing their potential as an uncorrelated asset for effective diversification.

High Price Volatility of Rough Diamonds:

The global financial crisis marked a period where rough diamond prices experienced significant volatility. Despite sustained consumer demand for polished diamonds, rough diamond prices plummeted by 50% as retailers, wholesalers, and manufacturers opted to sell down existing inventory rather than risk replenishment in an uncertain market.

Interestingly, 18 months later, rough diamond prices more than doubled, surpassing pre-crisis levels, driven by the industry's rush to restock in response to continued consumer demand. The expectation is that such pronounced volatility will persist, offering attractive trading opportunities for qualified investors who can navigate the market's fluctuations.

Single Stone Investment:

In a broader analysis, Low, Yao, and Faff (2015) identified 1.0 carat flawless diamonds as a strong hedge and a safe-haven asset. Notably, during the 2008 global financial crisis, these diamonds experienced the least volatility, with 1.0 carat flawless diamonds even rising in price when financial markets collapsed. The authors concluded that physical diamonds demonstrated satisfactory performance during periods of market volatility and should be included in a portfolio for their downside hedging potential. Top-quality flawless diamonds exhibited a strong negative correlation with international equity markets, making them an attractive store of value that can provide price stability and potential appreciation during market turmoil.

Larger and rare stones, resembling the high-end art market, carry characteristics of infrequent trades and unique pricing determinants, resulting in greater variability in outcomes and risks. Despite this, larger stones offer store-of-value characteristics and diversification benefits. The introduction of standardized exchange trading methodology on the SDiX platform enhances the recognition of diamonds as a rising asset class.

Industrial Applications of Diamonds:

Diamonds, renowned for their beauty, are equally valued for their exceptional hardness, making them indispensable in various industrial applications. The abrasive industry extensively utilizes diamonds for cutting, drilling, and grinding rigid materials. The growth of the construction industry has further intensified the demand for industrial diamonds, playing a crucial role in cutting, drilling, polishing, and grinding materials like glass, concrete, and ceramics.

Challenges of Cost and Price Volatility:

Despite the growing demand, the diamond market grapples with challenges related to cost and price volatility. The high cost associated with diamond extraction and the inherent uncertainty in natural diamond prices have left a notable impact. However, the market has seen a surge in lab-grown synthetic diamonds, offering a more cost-effective alternative. Price fluctuations in the diamond industry are influenced by factors such as consumer perception, rough diamond production, currency fluctuations, and evolving consumer buying patterns.

Cost of Carry:

The cost of carry for diamonds is defined as the expenses associated with storing a physical commodity or holding a financial instrument over time, is notably favorable. Carrying charges include insurance, storage costs, interest charges on borrowed funds, and related expenses.

Unlike traditional commodities such as oil and metals, diamonds have a fraction of the cost of carry due to their size and handling process. This advantageous cost structure, coupled with ease of storage and transport, distinguishes diamonds from bulkier commodities and adds to their appeal as an investment.

Future of Diamond Industry:

Continuing the trend of the past decade, the future demand for gem diamonds is anticipated to surpass global supply, leading to potential price increases. Existing mines, having surpassed their peak capacity levels, are facing increased production costs as they transition from open-pit to underground mining, and navigate stricter environmental regulations. The industry consensus is that no major new mines will be developed and operational in the medium term, given the considerable lead time of 7 to 10 years required to open a new diamond mine.

On the demand side, the United States maintains its position as the largest retail market for polished diamonds. Notably, China and India have surpassed Japan in recent years, with China emerging as the second-largest market for polished wholesale diamonds. The rapid expansion of retail jewelry stores in China underscores its growing significance in the global diamond market.

In the context of broader market dynamics, investors have witnessed volatility not only in listed stocks but also, in tradable forms of precious metals and commodities traditionally considered safe havens, especially following the last recession. In response to this, investors are increasingly seeking attractive, tangible assets characterized by low volatility and low correlation to other major asset classes, offering potential inflation hedging benefits. The heightened investor sensitivity to valuation characteristics has fueled a growing appetite for assets such as physical diamonds, where prices are fundamentally driven by real supply and demand dynamics. This shift reflects a strategic move towards assets perceived as more stable and grounded in tangible market fundamentals.

Conclusion:

The diamond market has witnessed significant developments, including the introduction of blockchain-backed diamond source platforms by major players like the De Beers Group. This technology ensures tamper-proof source assurance, enhancing transparency and traceability in the diamond supply chain.

Looking ahead, the diamond market is poised for steady growth. Factors such as increasing demand from millennials, expanding industrial applications, and technological advancements are expected to drive market growth. However, challenges related to cost and price volatility persist.

In the realm of investments, the polished diamond industry continues to evolve with a focus on increasing transparency, particularly as wealth accumulates in emerging markets. Diamonds, as precious commodities, serve as a store of value and a hedge against inflation. Currently representing only 3% of annual production, diamonds as investments have substantial upside potential in comparison to gold (40%) and silver (20%). The inherent rarity of diamonds further enhances their attractiveness as investments and valuable additions to diversified portfolios.

Author

Thakur Ajit Singh
Founder - Quick Turtle | Graded Financial Services | AskCred
Financial Expert | Trainer | Management & Placement Consultant
Cell: 8169810833