2.1.2017
All Indians and many global citizens who have their interest in
India held their breath till the Big Bang “Mitron” address by Prime Minister
Narendra Modi started on New Year evening. All celebrations were to start only
after that. This speech was to set tone for 2017 after the biggest and boldest step
of Demonetization which government of India took on 8/11. Before we discuss
that and try to peep into future to devise our individual plans, let’s delve
into 2016 and take stock of what emerged in 2016.
2016 : How it had been
Every year is an eventful year and so was 2016. It started with domestic
and global uncertainties looming large in its face, like that of negative
interest rates in most of the developed countries, declining energy prices,
growth challenges in many economies across globe. Turbulent Chinese economy,
referendum on Brexit, Trump’s win in US elections, US Fed’s stance on interest
rates contributed to the continuity of this uncertainty.
Back home swinging fortune of GST and other economic and legislative
reforms, interest rate policy of RBI, exit of Mr. Rajan as RBI Governor, some
state assembly elections and BIGGEST event of recent economic history
“Demonetization” had its telling effect on capital markets of India.
2016 saw least investments by FIIs in equity markets of only USD 3.2
billion many times lower than their 5 year’s average of USD 13.5 billion every
year. When we consider their investments into debt market, FIIs were actually
net sellers. They pulled out over INR 45,000 crores.
Contrasting this, domestic institutions poured in lot of funds that
saved Indian markets to good extent from the losses that FII’s exodus would
have caused. AUM of mutual fund industry alone rose by almost 3.5lakh crores in
this period. Investor’s preferences for SIPs have contributed to this a lot.
There are more than one crore active SIPs now in India.
How each asset class
performed in 2016 and Outlook for 2017
Equity: Equity markets started modestly. They started rallying from
February on hopes of revival in corporate earnings, passing of GST, Real Estate
Bill and other regulations, good monsoon, 7th pay commission etc.
But consumer demand failed to take off. There wasn’t significant increase in
government spending which delayed capex cycle. Corporate earnings also saw
modest growth. Valuations seemed a little expensive. And then came the demon of
Demonetisation which erased all the gains of markets.
Demonetisation for sure has caused slowdown in consumer demand &
resultant lower growth in GDP. It will impact the corporate balance sheet at least
for two quarters. This may get further accentuated on account of the complexity
and the scale of implementation of GST in near term.
New Year’s Eve address by prime minister suggests that this time
will be a populist budget which should leave more disposable income in the
hands of common man. It will boost consumer spending. Demonetisation and
increased emphasis and the way awareness is being created for digital payment
system is expected to boost government finances by way of higher tax
collections. This would support higher capital expenditure and lower the fiscal
deficit.
We believe that liquidity pain due to demonetisation will be over in
couple of months. GST because of the unified system of taxation will be very
positive over the long term as it aims to simplify the existing indirect tax
structure, prevent cascading of taxes, remove inter-state barriers and
formalize a greater part of the economy. This will eventually lead to higher
GDP growth, lower inflation and higher Government tax revenues on account of
increased compliance. By the second half of next fiscal, we expect corporate to
start reporting decent growth in their earnings.
After low participation in 2016 by FIIs, we expect them to come back
with larger volumes because of attractive valuations and higher growth
potential. Many banks have announced interest rate cuts for loans. Modest
inflation and good budget should also encourage RBI to further cut its repo
rates. All this should augur well for equity markets and one must start allocating
larger proportions to equity now.
Debt: 2016 had been a very good
year for bonds. India received normal monsoon this year after 2 years of
deficit rainfall. This helped by lower crude oil prices eased inflation
worries. It encouraged central bank to lower its policy rates by 50 basis
points in 2016. Yields on India’s 10-year benchmark bond fell more than 110 basis
points in 2016. On the other hand, Fed hiked the interest rates by 25 bps which
squeezed the yield differential on U.S. Treasuries and Indian sovereign
bonds.
We expect central bank to lower its policy rates between 75 to 100
basis points this year. It may start as soon as February. Fed bank in US is
expected to further increase its policy rates. This will narrow the difference
in yields between US & Indian bonds. It would result in further flight of
FII money from Indian bond markets. At InvestmentMitra we have been advising buying long term bonds since last
February and those who heeded our advice had seen good results. Now an investor
would be better off increasing exposure to accrual funds and short term bonds
with moderate exposure long term bonds or duration funds. One must keep a close
watch on the policy rates of both US as well as India and take advantage of the
announcements.
Gold: Surrounded by economic and political uncertainty, 2016 bode well
for gold. The yellow metal delivered a return of 9.7%. Mr Donald Trump’s
victory as the USA President, demonetisation in India and the possibility of
Fed’s rate hikes kept gold prices under check, otherwise 2016 would have been
an even better year for the gold. We expect moderate movement in gold
prices in 2017. Investors we advise use sovereign gold bonds and gold mutual
funds to invest in gold.
Real Estate: At InvestmentMitra we have always stressed on that
investment in real estate is a location specific subject. While NCR & most
parts of north India saw major correction, it was otherwise in southern parts
of India. Cities like Pune, Bengaluru or Hyderabad saw gains in prices though
modest. There would always be some short to medium term considerable movement
in real estate prices but in long term they will average out which will be
around rate of inflation. With introduction of Real Estate regulation act and
increased government emphasis on affordable housing and infrastructure should
help real estate stabilize and consolidate. It will still be 2 to 4 years when
one will be able to see real movement in its prices. But nevertheless these are
good level to buy properties. If you have funds you can negotiate very good
bargain.
Moving ahead
“What do you need in the New Year? You need a dream; your dream
needs an action; and your action needs right thinking! Without right thinking,
you can have only unrealised dreams!”
― Mehmet Muratildan
― Mehmet Muratildan
At InvestmentMitra we are of the view that first quarter of 2017
will be uncertain. Policy announcements by newly elected US president, Indian
Union Budget, state assembly elections, RBI’s & US Fed’s policy on interest
rates and rollout of GST will be the event to watch out for. Diversification is
the key and an investor must look out for opportunities to diversify not only
among asset classes but also within individual asset class.
Ø We had been advising to take advantage of every dip in equity market
for past few weeks. The investor should increase their allocation to equities
for creating long term wealth. SIPs over time has proved to be a silent wealth
builder and all should use this route.
Ø For debt portfolio should be biased towards short term and accrual
based funds. One must closely watch policy movements on interest rates and
rebalance its allocation to long term bonds or funds.
Ø In real estate those who can afford they should create portfolio of
rent yielding residential and commercial properties with some allocation to
bare properties as well.
Ø For gold one should create portfolio using sovereign gold bonds, ETF
and gold mutual funds.
You may write to us at info@investmentmitra.com
for any query with regard to your investments. We are open to your feedback and
especially your constructive criticism. That helps us immensely improving our
services.
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