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.