Where and how should you invest now?

We are living in very interesting times indeed and no one can really predict with a great deal of confidence as to how things will pan out for the economy or investors. However, some things are clear as far as trends are concerned and we can look at investment strategies based on these likely trends. In this post let me look at the most common asset classes and try to give a road map for the medium term which is till 2017 end.

As far as Debt asset class goes, it is fairly clear that will more cash being sucked out the system and inflation coming down the interest rates are going southwards. The government will also be under pressure now to show that some impact is there. In the RBI policy on 7th December I do expect some rate cuts. What will this translate into for the more popular debt investments and what should you be doing? In my opinion, here is what will happen in the next one year:-

  • Interest rates will go down by 1 – 1.5 % in the next few quarters. This will impact not only Debt instruments but also companies dependent on this factor.
  • Debt MF especially the short term variety will do well, so keep your investments in these and look at investing more in these.
  • You can lock in your interest rates wherever possible, as it seems very unlikely to me that there will be an upward trend in them for the next few years. Invest in long term FD and POMIS if you are comfortable with such products. 3 year FMP which are in the markets now may be a good option too.
  • For schemes such as SSY and PPF, the rates will definitely go down in the near future, most probably in January and again after the budget in April. While prediction on the rates is difficult, I think PPF will be at 7 % and SSY at 7.5 %.
  • Investors with investment in the above products should not panic and continue their investments as these are long term products and will tide over such issues.

What about equity markets then? Well, the current scenario is clearly bad for many companies and the economy overall in terms of these companies earnings. It is almost a given that the growth expected in Q3 and Q4 will really not happen now. The markets are very likely to suffer fairly deep cuts, especially if the budget also disappoints. I think Nifty will have strong support at 7000 levels and the lowest point will probably be around that. Beyond this point, a recovery both for our businesses as well as the economy is very likely and this may pull up the Nifty to 9000 or slightly more by the end of 2017. What should you then be doing with your stocks and MF portfolio now? Here is what I think :-

  • There are stocks in the IT, Pharma and Auto sector available at fairly inexpensive prices today. Start accumulating these and you can reap great rewards when the markets go back to the higher levels in about a year.
  • Rate sensitive sectors will do well. Look at Housing and related sectors which will get a fillip both from probable lower prices and lower interest rates. Housing Finance companies, Banks, Cement , Paint, Ceramics, Glass etc are all likely to benefit from this and so will stocks.
  • E-commerce companies, Banks will now benefit from the move towards cashless transactions and will do very well in the next year.
  • If your portfolio does not have such stocks, build it up with selective purchases over time. The next 6 months or so will be a great time for building a high quality direct stocks portfolio. Put as much money as you can in this.
  • As far as MF investments go, stop your SIP and look at making a few one time investments over the next 3-6 months. There is no point in buying with Nifty at 8700 when you can buy at 7500 or so. You have already seen this for your SIP in 2016, do not make the same mistake once again.

What about Real Estate then? While it is widely expected that prices will drop due to a lot of unsold inventory as well as the thrust against black money, I think it will take time for this correction to happen. End of 2017 may be a good time to buy the dream house you are looking at, you will get better prices and also good home loan rates. If you are trying to sell your house, do not do so now unless you really need the money.

The current crisis is also a time of great investing opportunities. If you take the right decisions over the next few months, the impact on your current portfolio as well as your future wealth will be hugely positive.

Demonetisation effect on your investments

Now that the dust is settling down a little on the currency ban of high value notes, it will be a good time to take stock of how all this is going to affect our investments. In order to do that, we need to understand the impact of the move on the overall economy and business first and then see how the different asset classes will likely behave.

It is important to understand that, in the short run, the ban will definitely have a fairly serious disruptive influence on the economy. A lot of financial transactions in India, especially in the rural sector is undoubtedly done in cash still. Yes, this is changing and the move will probably hasten the change, but this will take a fair amount of time. In the interim period the business will be affected adversely. The idea that a good monsoon will have a positive impact on rural spending has really been turned on it’s head. Sectors such as FMCG and manufacturing will have a negative impact right now.Several sectors like IT, Pharma and Banking were having serious structural issues even before this move and it will continue to struggle in the current scenario.

What is likely to happen? Well, assuming the GST implementation is not held up by political fight between the Government and the opposition, we are looking at a far cleaner system where tax collections will be done in a much better manner. The liquidity in the banks will help in driving down the interest rates and this will have a medium term positive impact on the economy and business. We have been waiting long for corporate earning to improve and 2017 may really be the year when it happens at long last. I think the budget will have some significant announcements on the Income tax front and this may well increase the money availability in the hands of people. This will further be a positive fillip to the improved corporate earning.

Against all of these, we need to also understand that the black money in the economy was fueling a lot of consumption, conspicuous or otherwise, and this will be affected in a negative manner. However, on the balance the likelihood of the overall economic impact being negative initially and then recovering sometime in 2017, is quite high. Based on all of these what will be the effect on your existing investments?

  • Initial impact on the equity investments will be negative, whether it is for stocks or MF. Understand that if you were doing SIP for last year you have bought your units at the high points of the indices and these will depreciate in the short run.
  • Several stocks will go down and your stock portfolio is likely to do rather badly till the recovery starts happening in real terms.
  • Your Debt investments in MF will do well for funds that are having a play on interest rates. I think the rates are bound to fall and the bond yields are going to be good.
  • Real Estate will not do well at all in the current term, buying it for investment or trying to sell it is a bad idea right now.
  • On the whole, you will probably see your net worth decreasing for the next 6 months or so but you should see it make up lost ground in the latter part of 2017.
  • Needless to say, whatever else you do, selling your portfolio in a panic mode will really be a bad idea. Even if you have some goals to meet now or in the near future, look at liquidating some debt instruments.

In terms of Nifty, I see a possibility of it going down to 7500 or even lower and then getting up to 9000 plus by the end of 2017. So how should you really be investing in the next 1 year time frame? Let me address it in the next post.

My personal experiences with the currency ban saga

So we are nearly one week into the most controversial decision taken by any government post Emergency and Mandal and maybe, in terms of the sheer coverage of the impact, it has eclipsed both of these too. After my last two posts it will be clear that I am a supporter of this move, as indeed I am with anything that has a negative impact on black money and the people who hoard such ill gotten wealth.

How has it impacted me and our family? To begin with I was not at all worried about it from a personal standpoint as our usage of cash has really been minimised in the past few years. I was probably one of the earlier users of credit cards in India, having got my first one in the year 1990, just 2 years after I started working. When HDFC introduced Netbanking in India, I was again one of the early adaptors and was one of the users actively giving feedback to them as also ICICI from a customer viewpoint. My wife Lipi, was a little slow to start off but she caught up with a vengeance and all our stock investments as well as most payments have always been online. As far as my children go, they are part of the online generation and find it tough to imagine that something can even be done offline !!

But I digress – the point is that we make any payment online if it can be done. This includes Educational fees for children, investments, property and other taxes, Electricity bill, Grocery shopping, Eating out, Movie tickets, Travel expenses and any large purchases. The only place we need cash is to pay for some services such as domestic help and others. I do keep about 3000 Rs in my wallet but have rarely needed to actually use it. One of the first things I did was to check my wallet to find I had a 1000 and a couple of 500 Re notes. As I had no intention of exchanging these, the best way was to spend them when I had to fill petrol for my car the next day, something I normally do through credit card.

We also had some 10,000 Rs in our house which we decided to deposit. However, as we really did not need any cash there was no hurry to get it done quickly. While going for my morning walks I was a little disappointed to find that most of the ATM were not working and the one SBI ATM which was open, not having any cash in it. For the past 5 days we did need to buy some stuff at the neighbourhood supermarket – again paid through credit card.

Today was the day, when we decided to venture out and deal with depositing the money at home and also withdraw some money needed for our trip to Bhopal, Jabalpur and Kanha next week. Between me and my wife we have bank accounts in HDFC, ICICI, Kotak, SBI, Citibank and Allahabad bank. Fortunately we live in an area where all of these banks have branches. So armed with all the check books, Proofs of identity and address along with copies thereof, we set out from our home at around 11:30 AM.

The first stop was HDFC bank, a new branch where there is hardly much traffic on a normal day. These are, of course, not normal times at all and I was not surprised to see 2 lines each with about 20 odd people in them. The organisation was good, HDFC people helping customers with information and also suggesting that only denominations of 2000 were available. We decided to take 14000 from here even though the bank was quite keen that we take our entire quota for the week which was 24000 now. The queue moved smoothly and we could do both the withdrawal and deposit at the same time. We got to know that the new 500 Re note and some 100 Re notes will be available later in the week.

Next up we decided to try Allahabad bank, thinking that this north Indian bank will probably not have more than a handful account holders trying to withdraw money on a week day. As it turned out I could not have been more wrong. Though the bank had more counters than HDFC did, only one was operating for all deposits, exchanges and withdrawals. Looking at the 50 odd people jostling around in a rather unruly queue was reason enough for us to give it a miss.

Next stop was ICICI bank which was just across the road. They were quite crowded too but when I said that I was a Privileged customer, the manager was willing to arrange the cash directly. However, he too had only 2000 Re notes so there was not much point in getting it.  Our last stop was Kotak bank, next door to ICICI – same story and conclusion again. We called it a day at this and adjourned for lunch at a close by restaurant, checking with them first that they did take credit cards !!

From my limited experience, here are my salient observations:-

  • The queues are reasonably long but manageable. The HDFC one took us half an hour and the Allahabad Bank would have taken a little longer. Rest would have been shorter.
  • Many people coming for exchange and deposits were not dealing with their own accounts. I think this may be a big part of the reason as to why the queues are long.
  • Most people were in good humour and seemed to be quite well aware of the mechanism like weekly withdrawal cap etc.
  • The ATM were not working in any of these places and I feel that is the biggest problem. The managers I spoke to told me they were waiting for the ATM to be calibrated with the new notes and this may take up to the end of the month in some places. In the larger cities they would get done by next week.

What next for us ? Well, we need to get some 500 and 100 Re notes before our travel begins on 23rd November. The hunt for cash will resume after a 2 day break.

Currency ban objections – too clever by half

So we are now coming down to the nub of the issue. A lot of political parties are trying to get together, no doubt supported by their patrons who have a huge vested interest in this. They have been coming out with a lot of ingenuous arguments as to why the move to ban the currency notes was a bad idea, even demanding for the roll back of the measure, as is their wont. In the last post, I received several comments and responded to a few. I think it will be easier to respond to the comments and other objections all in one place.

  • The fake currency being used for terror and other activities is “only” to the extent of 400 crores so it can be tackled through other means.
    • Are you not able to comprehend the damage that can be wrought to our country with that kind of cash?
    • The figure may or may not be right but, even if it is, what is there to stop people who have counterfeiting machines to simply print more?
    • Most people are unable to see the impact of the existing notes becoming inoperative. Think of all the terror operations being stymied as the system is suddenly dried up of the lubricant it thrives on.
    • It may not be a coincidence then that the news of terrorist operations from the Kashmir valley have really come down in the last week.
  • What is the point of banning 1000 Re note and introducing 2000 Re note?
    • You have not understood the purpose of the scheme at all if you are asking this.
    • The idea is to clean up the unaccounted money supply in the system. People who are having it will either have to use it ( no time to do that ) or deposit it in the bank, where it can now be tracked.
    • The 2000 Re note is a logical step as it is mighty inconvenient to deal with smaller denominations, given the inflation we have had in recent years.
    • Yes there is a possibility of new black money schemes ( people are crooked and clever after all ) but it will have to be from scratch now and in one fell swoop, years of accumulated black money has been dealt a body blow.
    • Similarly the 2000 Re note can also be subjected to counterfeiting but all that will take time and the authorities will be way more prepared now.
  • BJP has done it only because state assembly elections are coming up.
    • I am happy to see that political parties are at least accepting the link between elections and black money.
    • Is the argument that we allow black money to continue playing a role in the Indian elections?
    • Are the opposition parties scared that without the power of black money behind them, they have little or no chances in the upcoming assembly elections?
  • The scheme will not earn much taxes etc as people will not declare black money.
    • Once again this is not the purpose of the scheme. Whether the people declare it or not, the cash will be taken out of the system.
    • People were given a chance to come clean through IDS, those who have made a conscious choice not to do so deserve no more leniency.
    • After the deposits are done the IT authorities will definitely take up the suspicious cases. I foresee a lot of taxes being collected through this.
  • Common people are being harassed.
    • The implementation has had several bottlenecks and money supply through ATM and banks should have been handled better.
    • However, for most poor people an exchange of 4000 Rs is adequate as is the withdrawal limit of 2500 Rs per day now.
    • People getting inconvenienced in weddings and functions for lack of cash, can really start paying through checks and direct transfers.
    • The reason for using cash is not really that people only take cash – it is because people with black money want to keep their transactions out of the system by not having any recorded financial transactions.
  • There is very little black money in the system so this will have little impact.
    • Look at pictures of money in sacks and drains, 44 lacs being anonymously being donated to temples, 10 lacs of air tickets being bought etc.
    • Money laundering is the most searched term in Quora in the last week.
    • In a Bengal village an impoverished old lady has deposited more than a crore in her account which had no money earlier.
    • Make no mistake, the people who are intended to be hit by this are suffering greatly. They will do everything possible to thwart the move but the game has changed for them.
  • Many businesses and the stock markets will be affected adversely.
    • I think this may well be true in the short run but does it matter really? Are you going to support black money just so that your investments do not take a temporary hit?
    • Over time, businesses in India such as Real Estate which have for all skewed due to presence of black money will clean itself up and do well in a legitimate way.
    • Respect for India will increase due to this bold measure and that will ensure that our businesses and markets do well in the medium and long term.
  • India depends on cash, cashless transactions will not work here.
    • Again, in case you have not understood this scheme is not talking about cash less transactions at all. 
    • You may need to rethink – same was said about mobile phones a decade back and look at where we are.
    • Once smartphones are available with the right kind of pricing for data plans we will see a surge in cashless transactions. It will happen faster than we can imagine today.

I am sure there are many others but I suppose the point is made. This is a great step for India, many other mechanisms are needed to eradicate black money completely. Do not fall into the trap of wily politicians who are today really cornered about their ill gotten wealth as well as their situation in being unable to influence elections through cash and liquor as they have done in the past.

If we fall for their shenanigans then the fault is really with us.

My take on the high denomination note ban

There are few things in Indian governance and administration that come as a complete surprise and the banning of the high denomination notes was definitely one of the rare examples. Irrespective of which end of the political spectrum we support and whether we agree with the merits of the move, it will have to be said that the speech by the PM on 8th November took the whole nation by storm. The impact has been such that most people affected by it have been shell shocked and ended up behaving rather irrationally.

How do I see it? Well, I personally think it is a great move. Consider the facts – only 3 % of the Indian population pay any kind of income tax. Even out of this meager number, the majority pay taxes of less than 1 lac every year. Any logical person should be able to see that this is an absurd situation. In reality, only the people who are absolutely unable to evade paying taxes, namely the salaried class end up paying it and almost everyone else avoid it to some extent or the other. The amount of undeclared income in the system is not only creating huge fiscal losses to the exchequer but also resulted in a parallel cash economy where almost 25 % of our GDP is unrecorded.

The first thing to understand clearly is that we are talking about undisclosed income by cash dealing, not about whether one can take cash or spend in it. For example, if a Doctor takes cash from his patients in a rural area and then declares it as his income and pays taxes on it, there is absolutely no problem. However, we all know that most people who receive large amounts of cash either do not report it at all or under-report it to a large extent. If the number of people living in the urban centers were really earning less than the permissible tax exempt income then the living standards we see around us in these places would be significantly lower. Elections and political parties almost exclusively deal in cash and all parties are guilty of this.

The second thing to understand here are the ills of the system :-

  • The obvious one is less money available to the government for carrying out a lot of development work that the country is badly in need of.
  • Such income streams are clearly inflationary as there is too much unaccounted money in the system chasing too few goods that are available.
  • The real estate sector prices have reached astronomical levels and a big contributing factor has been unaccounted and undeclared money availability with buyers.
  • Even people who are honest about paying taxes are also guilty of one or many of the following practices:
    • Paying for services in cash with the hope of a cheaper rate.
    • Not reporting interest income in their annual returns.
    • Not showing rental income partly or fully.
    • Not reporting capital gains in the right fashion.

The third is to understand that our society is already unequal in terms of income and spending ability and this has only accentuated it over the years. The vulgar display of wealth in weddings, the bribes demanded for almost getting anything done and the compromise of the moral fiber resulting in widespread corruption can all be traced back to the dealings in cash. If unaccounted cash was not an acceptable option, all this will not go away completely but there will definitely be a great reduction to the perverse extent we are facing today in such situations.

I went around a bit and checked with a few people I know, in real life and through the blog to see why there is so much panic in the system. Here are some real life examples :-

  • An Uber driver earning 50,000 on an average per month – never paid taxes.
  • A local milk booth earning more than 1 lac per month in profits – never paid taxes.
  • A Doctor who had more than 15 lacs in unaccounted cash. When I asked him why he had not taken advantage of IDS, he told me he was saving it for buying an apartment.
  • A CA friend who has been inundated with offers of sharing black money if he could help in conversion to white.
  • Some friends of my son, whose fathers are in business, were worried as soon as the speech was made. Clearly shows their awareness about how much cash is at home !!

As they say, the road to hell is paved with good intentions and, despite the good intent, the implementation could have been much better managed. The non-availability of the new 500 Rupee note has been the greatest dampener as the ATM money is getting over soon and replenishing it takes too long. Also, the verification could have been just on the basis of Adhaar card, both for deposits and withdrawal. The general public has been put into serious inconvenience and the poor with little experience with banking system have been really the worst affected.

However, with the release of the new 500 Rupee note and the initial rush being over the situation will now become a lot better. I think in another couple of weeks, things will be back to normal. The impact of the aftermath would have been several times worth the inconvenience that many of us have gone through.

So what are the likely impacts of this move? Let me address that in the next post.

How will Nifty behave in the next year and why

It is rightly said that predicting the market levels in the short to medium term is fraught with the hazard of you looking really silly. However, the trends in the market are easier to predict and, with some knowledge and experience in the markets, you  will probably get it right more times than you get it wrong. Let me therefore attempt to try and give some overall predictions of the NIFTY trends between now and March 2018. I have tried to keep all explanations in simplest of languages and devoid of any jargon.

To begin with one will need to understand the key factors behind market performance in our situation. The determining factor in the markets is the amount of money pumped in and out by the FII’s. Most people do not understand this and keep looking at other reasons which are not quite so important. Now, the FII money will come in when they feel putting money in Indian markets is going to be better for them as opposed to other developing or developed markets. However, it can also go out when it becomes apparent to them that some other markets are relatively more attractive.The other important factor for the markets is of course the growth in corporate earning. As we all know real growth or the potential of it will help market up move and vice versa. The third important factor is some structural issues in particular industries, for example Metals, IT , Pharma etc. This may not effect all companies but if the sector has a good representation in the Index then the impact on the market levels can be serious. The final factor is sentiment based which is normally news driven – again either real or perceived facts.

So what is the environment really telling us right now. While there are many issues the most important ones are as follows:-

  • The US elections are expected to result in a win for Hillary Clinton. If Donald Trump manages to pull off an upset that will be a shock for the markets. This will be a bad news for Emerging markets as more money may flow into US at our cost.
  • The Fed rate hike is a given and this is again a negative trigger for the FII money to see a sell off.
  • Our own interest rate cycle is probably bottomed out or there is at most one more cut amounting to 25 bps. The bad news is that the stock price movement in the rate sensitive stocks we have seen lately will now come to an end.
  • Sectors such as IT, Banking, Pharma which are vital to the NIFTY are having serious structural issues now and are likely to see serious declines.
  • In general corporate earning growth has again disappointed this quarter and now the whole pressure will be in the next 2 quarters to deliver this FY. Given the indicators in most sectors this does not look very likely.
  • Auto sector, Consumer durable and the FMCG sector are likely to do well based on the good monsoons and 7th Pay commission outcomes.

As you can see from here, there are very few factors which are positive for our markets. I think the trend is clearly going to be negative and a 5 % correction on the Nifty is quite imminent. In case there is a major FII sell off then the correction will be way deeper and it can easily be 10 % or more. Over the next six months local factors such as the budget, assembly elections, GST implementation etc will hold sway and the outcome of most of these are again likely to be negative for our markets. I therefore anticipate further weakening of the Nifty till March of 2017 or so. Thereafter, assuming that there are no real shocks for the rest of the year in the global economy and markets, money is likely to flow into the Indian markets and we should end 2017, probably at the highest point of the year.

What are the Nifty levels we are talking about? Probably a low level between 7000 and 7500 by March 2017 and a high level between 9000 and 9500 towards end 2017. While the level of 7000 can be breached I do not feel this will happen for the 9500 level. Do remember that levels are far harder to predict and all numbers here should be taken as indicative and not absolute by any means.

Assuming that this is a reasonably accurate projection of the next 15 months, how will it be affecting your existing investments ? How will it make sense to invest in this period? Let me address it in another post.