Market View 2017-An important year with multiple impactful events
POST DEMONETIZATION
Initial cash shortage affected several sectors of the economy. Recent IMF forecast stated that Indian economy will grow at a slower rate of 6.6%. However, it is also expected that growth will pick up and regain its earlier higher rate within the next 2 quarters.
DIGITIZATION & TECHNOLOGY
Sunder Pichai in a recent interview stated that demonetization is a bold courageous move that could propel the country to the forefront of digital payments .Digital payments can be a catalyst for digitising the country in many other dimensions and is comparable to building a new big platform with multiplicative beneficial effect. For example, it can accelerate digitisation of trade flows and corporate data, augmenting India’s effort to improve ‘Ease of Business’. Stamp duties payment can also be made online. There could be a digital credit platform with pooling of information from various sources facilitating a robust credit appraisal-that can help in reducing the probability and scale of something similar to current NPA crisis in the Indian banking system
Nandan Nilekani believes that the proportion of digital payments in India will grow quickly and demonetization has compressed the time frame of a few years into a few months. According to him, India already has a very good digital infrastructure to enable billion people to transact digitally. 250 million smartphone users in India can use UPI apps. Money can be sent to anyone registered on UPI by keying in their mobile number. 350 million feature phone users can use USSD by dialling *99# and it offers options similar to UPI apps. It does not require internet connection. 400 million people without phones can use Aadhar enabled merchant pay. They just open bank account with Aadhar, swipe on merchant device, enter amount and money is deducted from bank account. However, awareness and behavioural change will take time.
Merchants are also coming on board. What attracts them is low transaction charge of mobile based system as compared to the card system that requires significant investment in PoS machines and other infrastructure. India unlike the West will digitize through mobile based systems which are much faster and cheaper to roll out. Additionally and importantly, when merchants accept digital payments, the income trail makes them eligible for credit from the formal sector at much lower interest rates.
Sunder Pichai in a recent interview stated that demonetization is a bold courageous move that could propel the country to the forefront of digital payments .Digital payments can be a catalyst for digitising the country in many other dimensions and is comparable to building a new big platform with multiplicative beneficial effect. For example, it can accelerate digitisation of trade flows and corporate data, augmenting India’s effort to improve ‘Ease of Business’. Stamp duties payment can also be made online. There could be a digital credit platform with pooling of information from various sources facilitating a robust credit appraisal-that can help in reducing the probability and scale of something similar to current NPA crisis in the Indian banking system
GST
GST introduction now scheduled for July 1, 2017 should also help reducing the proportion of cash economy. The mandatory paper trail that GST will create will go a long way in improving tax compliance. Additionally, participants in the chain will be eligible for input tax credits.
USA MARKETS & TRUMP
Markets picked up because of Trump’s plans to increase infrastructure spending and reduce corporate tax rates. However, the current USA bull market is almost 9 years old and there has been a considerable P/E expansion – P/E of S&P 500, has moved from 9 to 17. Therefore downside risks are more than before though market can continue to grow if earnings keep on increasing. With fiscal initiatives, Federal Reserve is likely to raise the rates 2-3 times in 2017 and USD should strengthen. It will be interesting to see how much of trade gets affected especially between USA and China. Indian IT industry can also be affected adversely with procedure for immigration and work visas getting stringent. There seems to be seriousness of implementation in Trump’s early days but USA system has checks and balances. Moreover, economic considerations might prevail eventually as far as trade and outsourcing are concerned.
INDIAN BUDGET
It is expected that measures will be announced to accelerate the transition from cash to digital transactions. In addition to augmenting digital infrastructure, a favourable tax regime is necessary for improved tax compliance. Therefore reduction in income taxes is expected in this budget. A cut in personal taxes can boost consumption while a reduction in corporate tax rates can get private investment moving.
A new regime for capital gains tax on equities might be announced. It is possible that certain measures might be announced to discourage cash use, for example, cash transaction tax on withdrawals of Rs 50000 or more.
Additionally there could be emphasis on infrastructure, agriculture and rural areas, affordable housing and poverty alleviation schemes. There is speculation that fiscal goals might be relaxed temporarily to create room for more public investment. There could be more spending on roads, railways and irrigation.
A bad loans bank might be set up to get stalled banks moving. There could be taxation incentives for housing and more black money measures including crackdown against benami property, large unaccounted cash and gold holding.
UP ELECTION
There are elections in several states, however UP dwarfs everybody and that election is very important. One significant development is formation of an alliance between ruling SP and Congress. BJP was expected to win comfortably with its usual 1/3rd share of votes but the alliance has the ability to overtake. SP in an opinion poll was expected to get about 26% while Congress 6%. Muslim vote is a considerable 19% and with the new alliance, there might not be much splitting-otherwise BSP was expected to get a substantial share. Consequently it will be a tough fight and outcome will be very important. A BJP defeat could make them lot more cautious while it could be a trigger for a major opposition alliance in 2019 national elections.
INDIAN ECONOMY
Abby Cohen, Chief Economist of Goldman Sachs says that that in medium to long term, India offers an extraordinarily good opportunity. India is expected to have less bureaucratic entanglement, court reforms and accounting reforms. Increase in labour force especially when there is the opposite trend in Europe, Japan and even China. Equilibrium growth in India is 7-8% as compared to 1% for Euro zone and 2.25% for USA. Additionally India is moving towards greater economic transparency. Even with USA interest rates going up and the political developments, USA will still remain a significant importer. Also just because USA is growing, not all emerging markets will suffer. Indian economy is primarily domestic consumption led and its own financial flows are becoming more and more significant.
Essentially, we continue to hold the views amidst the global turmoil and slowness, India remains a bright spot. By accelerating reforms, India is gradually taking the leadership of fastest large economy away from china. India has the demographics, it still has a low base and we see a lot of potential.
RECOMMENDATION
Based on above belief, my recommended asset allocation for maximising the benefit of our savings is following:
1 For money with a time horizon of more than 3 years, equity will be very good. Selection of schemes should be in multicap schemes with a good track record of alpha generation with small sectoral allocation to banking and infrastructure sectors. Pharmaceutical sector corrected in 2016 and existing investment could be retained.
2 For money with a time horizon of 1-3 years, balanced funds with a mix of equity, equity derivatives and debt will be good, since tax treatment being similar to equity funds is better than that of debt funds. Additionally, even in a down market, they hold their value well on a comparative basis.
10 year bond yields have fallen in the last year from 7.8% to 6.4 %. It is possible that the government decides to spend more and extend the time frame for reduction of fiscal deficit to 3%. In that case, bond yields could go up Duration funds could be avoided for the time being, till the post budget situation becomes clear.
3 For 0-1 year time horizon, short term and liquid debt funds are a good alternative. For people requiring monthly income stream, a SWP (systematic withdrawal process) could be structured in a tax efficient manner.
4 Real Estate is expected to fall and might stabilize in about a year’s time providing a good buying opportunity later. It is possible that affordable housing segment might do better. Therefore, my recommendation will be to wait and watch. In the interim, grow your savings in financial instruments which are expected to outperform.
5 Gold- As I have always written, historical returns of Gold are very low , although periodically it does go through fairly long period s of appreciation and then can decline for quite some time-long term overall trajectory is almost flat. Therefore, invest only that proportion of savings which fulfils your real gold requirement and not as a return enhancer.
