Saturday, 12 November 2016

A Tale of Two Events

What a week this has been - Two events that shook 2 of the world's largest democracies and the Indian Stock Market!!

Here are my views on the events....

Against all predictions, Donald Trump wins the Presidential election riding on the anger of America's poor & less privileged. Over the last 8 years, US has been trying to revive their economy by keeping the interest rates near zero - hoping that cheap money would encourage businesses to invest & individuals to spend - with unsatisfactory results. This was the 'Monetary Policy' method of reviving the economy through increased Consumption.

What Trump advocates is increasing Government spending on various projects which will have a ripple effect through businesses/individuals getting contracts for supplying goods & services. In other words, increasing the 'Fiscal Deficit' to revive the economy. 

The Impact
The interest rate in US has risen and FIIs are, therefore, moving way their investments from Emerging Markets like India back to US.

To curb Black Money & to check Terror Financing, the Indian Government banned use of Rs. 500 & Rs. 1,000 currency notes - effectively making 86% of currency in circulation illegal.

The Impact
Besides a temporary inconvenience to the general public, there will be huge long-term impact of this bold step.
  1. The currency notes of Rs. 500 & Rs. 1,000 in circulation approximately add up to a staggering Rs. 14 Lakh Crore. Out of this approx. 30% (i.e. Rs. 4 Lakh Crore) will never come back into circulation because the hoarders would not risk identification. Since currency notes are in effect RBI liability (Govt. debt), this would mean a write-off of Rs. 4 Lakh Crore debt, thereby, improving the Govt. Fiscal position
  2. Interest rates would come down sharply in near term
  3. Big ticket consumption would suffer and therefore, Corporate profits may be down for at least next 4-6 months. This would lead to weakness in stock market over next 6 months
What Investors Can Do
  1. Risk-averse investors should park their maturing Fixed Deposits in Ultra-Short Term Debt Schemes of Mutual Funds. The returns would be better than bank FDs over 1 & 2 years.
  2. Those thinking of investing in 3 years Fixed Deposits would be better off by investing in Dynamic Bond Funds for 3 years for far better post-tax returns than a Fixed Deposit.
  3. Those with 5-year horizon should invest in a staggered manner in Equity or Equity Funds over next 6 months
  4. Those with 10-15 years horizon should not even bother. This will pass - just like World Trade Centre attack (9/11), Lehman Crisis, BrExit and countless others which you may not even remember!!

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