Emerging New World for Indians

Market is down today. New announcements on demonetization and black market control are coming every day from government. Stock market is trying to make meaning out of these actions and changes the value of stock prices based on its assumptions. Lot of volatility will be there. On one side we see bank stocks going up and another side NBFC are losing its value. FMCG stocks are also under correction. Real estate companies are already down. Now cement stocks are under correction due to outlook on real estate growth. The shock of restriction on currency circulation will take few weeks to few months to die down.

Indians are clever and innovative. We will find new loopholes to get back to business. Or we may learn to live with lesser currency circulation also. Besides all the troubles and frustration, common man is supporting government actions. That is a very big support and strength to Modi. He will proceed with other clean up actions.

 

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Inflation and Interest Rates:

Since banks are flush with cash now, ( the deposits are still coming in) they need to buy government bonds mandatory  to fulfill their statutory obligations. This will reduce yield on Govt bonds and this will have effect on all corporate bonds. The demand for bonds will be more than the supply, that will bring down interest rates.

Taking black money out of circulation and reducing cash supply will bring down inflation. Already reports say people reduce their cash expenses, try to live with lesser cash. This will also bring down inflation.

For these reasons RBI will make few more cuts on interest rates. Some experts estimate 250-300 basis point cuts. ( 1 basis point = 0.01%). Even half of that amount will have significant on the fixed income portfolio. FD rates will see 5-6% rates very soon. Even savings account rates can drop to 3%.

This is going to be a squeeze on retiree expenses who is solely depending on the fixed income to make the living. This is a new environment for many of us. Some of the things I anticipate are never experienced by any Indians so far in their life. It is going to be life changing event.

Never ever ever underestimate what is in store for us. 2016-17 is going to be a year many of us will look back and tell stories about to our grand children.

It is going to be a different play field and different games. We will have some new winners and some new losers. Some companies may emerge stronger and some will go bankrupt. It will be foolhardy to take sector bets or individual stock bets and try to play stock market with your old beliefs and valuation figures.

Investor Action

Fixed Income

  • I always discourage holding fixed deposits except for emergency funds. Now there are more reasons not to hold them.
  • When interest rates go down, bond funds will appreciate quickly. If you are holding bond funds, you will see nice return your portfolio due to interest rate drops. I will not be surprised if your one year return is around 9-12%, much higher than bank deposit rates.
  • Unfortunately some of us will not enjoy those benefits, because for LTCG benefits we have to hold them for 3 years. In 3 years time some of the gains will evaporate. But it is still right investment option for fixed income asset class. Don’t pile up on bond funds with corporate exposures. Even the NAV of those bonds will be volatile.

Real Estate

 

  • Real Estate as an investment lost its glitter. The skeleton for the Real estate industry is black money. You will see some distress fire sale. Instead of jumping in thinking it is good value use caution. Don’t apply old valuations to judge the future profits. Game has changed, new rules and valuation principles apply.

Gold

  • Gold – In short term the prices of the gold in India is expected to go up. This will be the new currency for black market transactions. Bribe may be demanded in gold coins. International gold prices are correcting and we in India may not feel that price drop. Government is expected to announce new restrictions for gold trades, gold imports. Proceed with caution. Always use SIP even when the future is not clear.

Stocks

  • Individual stocks are very risky. Even quality companies are not safe nowadays. Until a clear pattern emerge, Indian stock markets will be very volatile. They need time to figure out the future cash flows of the companies and assign valuation. Until then
  • Buy stock mutual funds. Buying MF scheme are low risk investments with professional management.
  • Cash is king. So, keep some money in liquid funds and bank accounts to make use of opportunities. Don’t put all your money in the stock market. Keep your gun dry and have enough ammunition.
  • When market drops do switches from liquid funds to stocks funds. If you are looking for same day NAV make sure you do switches for 199,000 or lesser. Otherwise you will get next day NAV.
  • This limit is per scheme limit. If you plan to invest more, you can do switches to different scheme.
  • Don’t invest money in lump sum. Use STP technique to invest money.

As Chinese proverb say – May you live in Interesting Times !

3 Responses

  1. Srividhya says:

    Great Article RRK!!

  2. srinat2015 says:

    well done RRK .

  3. Ramesh says:

    Fine analysis! The effect of demonetization is much wider than smoking out the black money. It IS a game changer for investors. Thanks for a giving us a glimpse of new world, RRK!

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