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| December 30, 2016 |
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Impact 
2016 was an eventful year for capital markets across the globe. Towards the beginning of the year, there were many uncertainties including those about negative interest rates across the board, slumping energy prices, and the growth concerns in some of the major economies of the globe among others. The slipping Chinese economy raised serious doubts about global growth. The International Monetary Fund (IMF) reduced global growth estimates to 3.4% from 3.6%.
U.S. Presidential elections, the monetary policy stance of Federal Reserve (Fed), a referendum on Brexit were some significant events. The pendulum of ‘risk-on’ and ‘risk-off’ trade kept the bulls and bears on tenterhooks. However, in the end, it seems the market has rewarded those who were bullish on developed markets, especially the U.S. markets. Similarly, investors in base metals had a reason to smile. US$ index touched a 14-year high after Mr Donald Trump won the U.S. presidential elections.
This phenomenon affected the flow of capital to emerging markets. The emerging market currencies were under constant pressure—first due to the uncertainty around Fed’s policy stance and then due to the US$ strength. Markets in India were affected by domestic as well as international factors.
Speaking about domestic factors; demonetisation, the exit of Dr Raghuram Rajan as RBI governor, and state assembly elections were the main events. Mixed global and local cues kept investors guessing about which asset class will race ahead.
In 2016, India has seen the highest outflows in the last 7 years. Foreign Institutional Investors (FIIs) remained net sellers in the Indian capital markets (debt and equity together) as they pulled out Rs 45,037.66 crore.
Between January 2016 and November 2016, Assets Under Management (AUM) of mutual fund houses rose from Rs 13.54 lakh crore to Rs 16.94 lakh crore. This surge in AUM was mainly on account of increasing investments from domestic retail investors into mutual funds through Systematic Investment Plans (SIPs). As reported by Business Standard, dated December 20, 2016, mutual funds now have 1 crore active SIPs.
How the year 2016 was for Indian equity markets?
Though we had a quiet start to the year 2016, the rally that began in the last week of February drove the Indian markets forward swiftly. Mid-caps soared and, at one point in time, some of them were over 50% from their February lows. The rally was based on the hopes of a revival in corporate earnings. The consumers' demand failed to take-off.
The Government spending also appeared to plateau which further delayed the capex cycle. In effect, corporate earnings grew only modestly. Valuations seemed expensive after factoring in the muted growth. Demonetisation nipped the green shoots in the bud. In the short term, the growth will be affected negatively. The long-term impact is yet to be seen.
The fall in the aftermath of demonetisation erased almost all gains on most of the indices.
S&P BSE Sensex witnessed 0.8% gains while S&P BSE Midcap and S&P BSE Small Cap recorded 5.9% and 0.1% gains respectively.
Domestic Institutional Investors (DIIs) more than offset the outflows of the FIIs, which saved Indian markets from incurring substantial losses. The unprecedented interventions of RBI in the forex market kept Indian Rupee incredibly high against US$ in real terms. FIIs participation in Indian equity declined considerably in the last quarter of the calendar year as they remained net sellers. Nonetheless, their net investments for the year 2016 amounted to Rs 21,754 crore as on December 29, 2016.
Indian bonds remained in high demand…
Indian bonds had a fantastic time in 2016. The Government reiterated its commitment to walking on the path of fiscal prudence. After 2 consecutive years of deficient monsoon, India received a normal rainfall in the year 2016. As a result, inflation, that showed some upside risks in the first half of the year, cooled-off month after month starting from July 2016. With estimated foodgrains production of 135.03 million tonnes, 2016 was a bumper harvest year for the Indian agricultural sector. As a result of that food inflation too declined steadily after July 2016. This provided elbow room to India’s central bank to lower the policy rates by 50 bps from 6.75% to 6.25% in 2016.
Yields on India’s 10-year benchmark bond fell more than 110 bps (Basis Points) in 2016. On the other hand, Fed hiked the interest rates by 25 bps which squeezed the yield differential on U.S. Treasuries and Indian sovereign bonds.
Demonetisation helped banks improve their deposit levels, and as a result, yields on short-term papers declined sharply. Long-term bonds rallied as well. Bond prices and yields share an inverse relationship. Well performing short-term and long-term income funds clocked gains in the range of 8%-14%.
Gold was one of the most preferred asset classes for Indian investors
The year 2016, has been a favourable year for gold. Surrounded by economic and political uncertainty, the precious yellow metal delivered a return of 9.7%. Mr Donald Trump’s victory as the 45th President of the United States and the possibility of Fed’s rate hikes kept gold prices under check, otherwise 2016 would have been an even better year for the precious yellow metal.
Gold turned bold in 2016
(Source: ACE MF, PersonalFN Research)
India and China, the world’s two foremost demand drivers of gold continued to add more quarter-on-quarter. But these numbers were lower compared to last year. The demand in India was 441.2 tonnes, down -28% compared to last year mainly due to: near-record prices, Government regulations, and still-fragile rural demand. Overall, the global demand for gold too weakened due to higher prices.
Also, the crackdown on black money vide a decision to demonetise old Rs 500 and Rs 1,000 bank notes, also weighed on gold. Initially, many rushed to convert their cash holding into gold. This even led to gold prices commanding a stupendous premium in the grey market for the initial two days after demonetisation. But soon prices corrected with raids being conducted amidst the crackdown on black money. People were fearful and consumer demand for gold slowed, despite it being wedding season.
The road ahead…
PersonalFN is of the view that, 2017 may also be full of uncertainties and investors would be better off investing as per their personalised asset allocation plan. Speculation in any form may bring down the performance of your portfolio. The Union Budget 2017-18 and the roll out of GST as well as the outcome of the UP elections would be the events to watch out for.
Three things to remember while you invest in 2017…
- Invest in equity mutual funds through SIPs
- Don’t invest in debt mutual fund schemes unless the maturity profile of the scheme concurs with your time horizon. Furthermore, don’t invest more than 20% of your debt portfolio in long-term debt funds.
- You should have 10%-15% of your portfolio in gold and should try to invest in paper form—through gold ETFs (Exchange Traded Funds) or Sovereign Gold Bonds.
Happy investing!
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Impact
The Government recently passed an ordinance named as "The Specified Bank Notes Cessation of Liabilities Ordinance". This is meant to bring down the curtains on the demonetisation episode—which is unforgettable for any Indian. However, if you have forgotten to deposit scrapped currency notes in bank accounts for any valid reason and if you can’t exchange them against new notes at the specified RBI offices before March 31, 2017, you may land yourself in big trouble. Reason?
Holding more than 10-currency notes post March 31, 2016, would be a criminal offence and would attract imprisonment upto 4-years along with a financial penalty. The fine would be the higher of either Rs 50,000 or 5 times of the value of old notes found.
As the name suggests, the ordinance would eliminate the liability of RBI or the Government on the demonetised currency. This would help the Government and the central bank to secure their position in any litigation that may arise in the future, challenging the move of demonetisation. Also, there is now a possibility that the RBI may declare ‘special dividend’ to the Government. Further, along with the cancellation of liabilities, assets (government securities) of the corresponding amount would also get cancelled. This may help the Government also save some interest cost.
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Impact
Demonetisation has taken many twists and turns. Whether the economy has benefited through this strenuous exercise or it's just been a damp squib—the picture will become apparent only in the next 3 quarters. However, what can be said with a lot more confidence is that the demonetisation has turned the country upside down. It seems now those hoarding cash will always be in two minds—whether to come clean or wait for the right opportunity to channelise the black money into the mainstream.
The Government is planning to blockade these channels now.
Real estate is an asset class that has always helped black-money holders to purge their sins. It's been an old practice to buy properties in the name of a person who would be the owner of the property just for the legal records. Of course, there's no official estimate as to exactly how much money has infiltrated the mainstream through such deals. Such Benami (Anonymous) transactions hurt the economy in 3 ways…
- Benami properties provide black-money holders with an escape route.
- It hurts the real estate market negatively as prices keep climbing.
- The income generated on such properties increase the supply of black money in the system.
Sometimes, these secret deals happen in the name of fictitious persons as well. Everything including property deeds, personal identities, and address proofs would look real, but deeper investigation surfaces the truth.
After December 30, 2016, the Government is likely to focus on nabbing these Benami property holders.
To read more about this story and Personal FN's views over it, please click here.
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Impact
With only a few days left before the deadline ends to deposit the scrapped notes in banks, everybody is anticipating that the curbed limit on cash withdrawals will also be lifted soon. However, going by what the State Bank of India's (SBI's) Chairwoman, Ms Arundhati Bhattacharya, shared with the media recently, it seems neither will the restrictions on cash withdrawals go in a hurry, nor the interest rates on deposits be restored to pre-demonetisation levels.
According to the top banker of India, there is a keen interest among people in going digital; which is why there is a possibility that more than 15% deposits that have flown into banks post demonetisation, may stay back. Some bankers expect the retention rate to be as high as 40%. So, let's assess how it would impact banks…
Banking problem: Higher deposits and lower credit growth
As per the RBI, banks had received Rs 12.4 lakh crore worth scrapped notes until December 10, 2016. It's needless to say that, this figure would climb up by December 30, 2016. Besides, the RBI data for the Q2FY17 reveals that all scheduled commercial banks in India had Rs 28.35 lakh crore in savings bank accounts.
Thus, a conservative estimate suggests that the banks may witness a retention of anywhere between Rs 1.87 lakh crore or 2.49 lakh crore in savings bank accounts post demonetisation (assuming a retention of 15%-20%). In other words, as compared to the level of deposits in savings bank account at the end of Q2 FY17, the bank deposits in savings accounts may grow at 7%-9% - everything else would remains the same.
From 10.38% in April 2016, the credit growth of banks has shrunk to 5.76% as on December 9, 2016. The average loan growth for the last 3 months has been 8.7%. It is also expected that unless the cash crunch in the economy ends, credit growth won't witness any revival. On the contrary, banks expect the bad loans to escalate in the aftermath of demonetisation.
To read more about this story and Personal FN's views over it, please click here. |
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If you challenge the Government to come up with ideas on making a dent in your wallet, you will find yourself losing the plot every time. Besides taxes and surcharge, the Government levies cesses under whatever possible names it can—Swachh Bharat Cess, Krishi Kalyan cess, Education Cess, Infra Cess… the list may run long. Now the Government is pondering on imposing a ‘betterment fee’ on real estate buyers and sellers.
No. it’s not a blanket provision meaning it won’t apply to you unless you are planning to buy or sell a property in a locality that is anticipated to witness a massive property boom due to large infra projects funded by huge public investments. The municipal authorities are likely to claim their share in your profits. This is a concept based on the principals of Value Capture Finance (VCF).
While there is nothing wrong in imposing new taxes under whatever name the Government wants, it must ensure that charging them is justified. People already pay municipal taxes, road taxes, and water taxes apart from cesses; they receive bumpy road rides, poor road safety, inadequate and contaminated water, and pathetic infrastructure which serve as a proof of political and bureaucratic corruption.
What does the Government do with the taxes it collects?
Splurges them on building monuments. Almost all Governments have indulged in such practices without fail. As against that, the income of political parties are exempt from tax, pensions to MLAs and MPs are exempt from tax. Let alone about paying taxes, how many politicians have you seen paying the toll?
Yet, you as a citizen have to share your profit with the Government as its resources are constrained. And, it’s only the common man who has to play his role in building the nation. Politicians would play their part in building personal wealth.
For whose betterment will there be a fee charged? Even an illiterate person would have an answer to this question.
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Economic Stimulus: Economic stimulus consists of attempts by governments or government agencies to financially stimulate an economy. An economic stimulus is the use of monetary or fiscal policy changes to kickstart growth during a recession. Governments can accomplish this by using tactics such as lowering interest rates, increasing government spending and quantitative easing, to name a few.
(Source: Investopedia)
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Quote: "Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world. "- Franklin D. Roosevelt
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