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How Should You Plan Your Investments In A Demonetised Era... - Outside View by PersonalFN

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How Should You Plan Your Investments In A Demonetised Era...
Nov 30, 2016

The demonetisation of old high denomination notes - Rs 500 and Rs 1,000 - may have caught you off-guard. The limits on cash withdrawals would have led you to curb your spending or move to cashless payments. While you still find a way to cope with the situation, do not let it affect your investment decisions.

The demonetisation effort is termed as Prime Minister Narendra Modi's "surgical strike" against black money. Black money may be the primary objective of the currency ban, but many are looking at how it will affect the different sectors of the economy. Sectors dependent on cash may suffer the most.

The Government claims that the disruption is only temporary, but will it have long-term insinuations? Many expect the ban to hamper India's GDP growth. According to media reports, GDP growth projections by brokerages has slipped to as low as 3.5% for 2016-17.

How have the markets reacted?

Stock prices have trended lower over the past few weeks. Bond yields have fallen. There was a sharp spike in gold prices in local markets just after the ban, but lost some sheen (on possibility that the U.S. Federal Reserve may hike interest rates in December or early next year, making the greenback stronger). It is also said that real estate prices may correct by 20-30%.

So, let us understand the potential impact of this on your investment portfolio, and the investment strategy you should follow. We take each asset class one by one...

  • Equity

    Stocks prices have moved lower over the past few weeks. Besides the domestic factors, global cues too have been in play. There is uncertainty looming round the world with America having voted, Mr Donald Trump to power as the 45th President of the US (who promised to inverse internationalism practiced by predecessors of both parties). A possibility that the US Federal Reserve may raise rates soon - and more so under Mr Trump - is weighing on the market. This has caused much volatility. Foreign investors have been net sellers of Indian equity for the past seven trading sessions. The huge sell-off, amounting to over Rs 8,500 crore, has dragged down stock prices and S&P BSE Sensex to below 26,000.

    So, in a sense, Mr Donald Trump's victory and demonetisation in India are proving to be a double whammy for the Indian equity market. Constrained liquidity is also showing a bearing. It's been a tumultuous week, with nervousness setting it.

    Although valuations have dropped, growth concerns do not offer a comfortable margin of safety. The demonetisation move could affect India's consumption story, while banking may be beneficiaries, especially the Public Sector Undertakings (PSUs) abetted by higher deposits. However, in time to come the reduction of lending rates come as saviour to many interest rate sensitive sectors, including real estate.

    Your investment strategy: During such times, some investment advisers and even the media may suggest investing in banking funds exhibiting the double-digit returns generated so far; but it is best to avoid sector / thematic funds during such times. They are anyway a very high risk-high return investment proposition. Instead, invest in 'opportunities style' diversified equity schemes that are free to invest across sectors and market capitalisation as per their investment mandate.

    To help you mitigate the volatility, opt for Systematic Investment Plans (SIPs) and / or Systematic Transfer Plan (STP) to stagger your investments over the long-term. Thoughtlessly investing or speculating can be hazardous to your wealth and health. Refrain from buying aggressively; instead be selective with enough prudence.

    While buying mutual funds for your investment portfolio, choose them carefully. Prefer funds from which follow strong investment processes and systems and invest for the long-term - at least with a 5 years investment horizon.

    PersonalFN believes that your investment discipline and asset allocation would decide your success in investing. Therefore, continue to invest in equity if your risk appetite and asset allocation permits, but adopt a sensible approach.
  • Debt

    FIIs sold debt investments too, amounting to over Rs 10,000 crore over the past four trading sessions. Yields continued to drop as much as 40 basis points between November 7 and November 18. This was because banks faced a deluge of deposits, bringing in the unaccounted money into the system.

    Falling yields and mellowed down inflation (CPI inflation at 4.20% for October 2016) are surfacing expectations of a rate cut by RBI in the fifth bi-monthly monetary policy statement for 2016-17 (scheduled on December 7, 2016). So, with space for policy action opened up, interest rates in the economy are expected to go downhill. As far as keeping liquidity conditions comfortable, RBI may do whatever it takes to do so. RBI may even consider the rise in bond yields in the U.S. - the 'Trump-effects' before articulating the fifth bi-monthly monetary policy.

    Your investment strategy: So, although there is space for policy action opened up and interest rates in the economy are expected to go downhill, there is no point going gung-ho on the expectations of a rate cut. A rally is already been captured at the longer end of the yield curve and further steam seems to be lower. Not surprisingly, over the year ended 18 November 2016, the entire segment of debt funds returned around 12-15% on an average - much higher than what you would have earned from bank fixed deposits. The returns of most long-term gilt funds hovered around 17%.

    Therefore, do not go overboard while investing at the longer end; refrain from investing more than 20% of your allocation in long-term debt funds. We suggest you should consider dynamic bond funds (as they have an investment mandate to take positions across maturity profile of debt papers) while taking exposure at the longer end, provided you have an investment horizon of at least 3 years.

    In case you have a time horizon of less than a year, stay away from funds with longer maturities. If you have a short-term investment horizon of 3 to 6 months, you could consider investing in ultra-short term funds (also known as liquid plus funds). And if you have an extreme short-term time horizon (of less than 3 months) you would be better-off investing in liquid funds.
  • Gold

    The price of gold that touched Rs 30,600 is now trading about 3% lower at Rs 29,666. On the day of the announcement of demonetisation of high value currency notes, there was a huge demand for gold as buyers sought to dispose of their defunct notes. This led to a temporary surge in domestic gold prices. But, as the government keeps a watch on high value cash transactions, this may negatively affect the price of gold. There may be a lower demand for gold from India. Earlier in the month, the World Gold Council estimated that the total demand for gold in India would fall by as much as 24% to 650-700 tonnes in CY2016, the lowest since 2009.

    However, these estimates would need to be closely gauged against the global uncertainty that's haunting the world. Mr Donald Trump's victory as the 45th President of the U.S. exposes many economies to uncertain times ahead, at least if one goes by statements made by Mr Trump during U.S. Presidential debates. The path to "Make America Great Again" goes through revisiting trade relations with many countries. In his June 28 speech this year, Mr Trump had said, "Our politicians have aggressively pursued a policy of globalisation-moving our jobs, our wealth and our factories to Mexico and overseas." Such remarks have sent shivers down the spines of those countries which heavily depend on U.S. exports. And that's not the end, his whims and fancies go much beyond this. On April 1, he shook the world when he tweeted this - "We must build a great wall between Mexico and the United States!".

    Likewise, slowdown in China, morose economic conditions in Japan, a debt-overhang in the Eurozone, and geopolitical tensions, are reasons to take refuge under gold, approach it as a safe haven. Further, the accommodative policies adopted by the central banks in developed economies are supportive for gold. But if in December Federal Reserve does increase interest rates, it may have some bearing on gold as the greenback get stronger. Nonetheless, the long-term impact on gold would be hinged on the policies Mr Donald Trump carves for the U.S. which will have ramifications even for rest of the world.

    Your investment strategy: Allocating a portion of the investible surplus to gold would be a prudent strategy. Allocate at least 10% to 15% of your entire portfolio to gold and hold it with a long term investment horizon. In fact the subdued prices at present, offer the comfort zone to do so. However, do not speculate on the price movement of gold.

    Gold is a safe haven in times of crisis. It acts as a hedge, or a store of value and can be an effective portfolio diversifier. You may buy gold Exchange Traded Funds (ETFs) or subscribe to Sovereign Gold Bonds, which are the smart ways of taking exposure to gold.
  • Real Estate

    There are expectations doing the rounds that property prices will correct by 20-30%. A blow to cash transactions is estimated to hit real estate demand. However, in our view, property prices might not substantially reduce to what many expect. The introduction of new Rs 500 and Rs 2,000 notes will open up a new gateway for black money. Due to the cash crunch, sales may fall in the short-term.

    Builders will be unwilling to offload the inventory at steep discounts, as they are very well aware that while there's short-term pain, the practice of cash transactions will once again prevail with new high denomination bank notes.

    In addition to this, as the currency ban is driving deposits; bank lending rates may fall further. This may attract homebuyers.

    Your investment strategy: If you are an investor, buying property and renting it out will be an attractive proposition with lower costs of borrowing. Remember, investment in real estate is risky and highly illiquid. Therefore, even if you have a surplus to invest, you should first assess your risk appetite before committing your hard-earned money.

    But if you're looking to buy a house property as a primary home - ready to move in with your family - any time's a good time to buy. This is because the objective here is not profitability. It's mainly your family's comfort and therefore you need to look at the location, developer, quality of construction, whether all plans are sanctioned and proximity to amenities.

To conclude...

PersonalFN believes, if you plan well and thoughtfully make your investment decisions - and not based on speculations - it can go do well in your path to long-term wealth creation. Don't panic; instead keep investing in wealth creating investment avenues to achieve your financial goals. Always keep a check on your investment portfolio and ensure that the asset allocation is in line with your financial goals.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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