 "Opportunities amid chaos")
Demonetisation and the government's other measures against undisclosed money are expected to drive more money into the formal banking system. One positive long-term change this is expected to trigger is to lead people to invest more in the equity markets and in mutual funds. Earlier, people were over-allocated to physical assets like gold and real estate because they wished to hide their black money in these assets. Now, with that incentive eliminated or reduced, more investments may flow into financial assets. Let us now turn to the impact of demonetisation on various asset classes and how you can benefit from these events.
Correction has thrown up buying opportunities
The equity markets are down five per cent since the government announced currency demonetisation. Returns of all equity mutual funds are in the negative since then. Mid- and small-cap funds are down by 7 and 7.94 per cent respectively while large-cap funds have fallen 5.29 per cent. Sectors such as real estate and automobile have been worst hit, with their indices falling 20.23 per cent and 11.5 per cent respectively.
Investment managers are of the opinion that the markets are overreacting to this event. While some sectors may continue to be impacted by demonetisation, the market correction has also thrown up opportunities to buy good stocks at reasonable valuations in others. “While demonetisation led to a correction, you also have to realise that mid- and small-cap stocks were in a bubble zone and waiting for a trigger to correct,” says G Chokkalingam, founder, Equinomics Research & Advisory.
Direct stock investors should stay away from sectors directly impacted by demonetisation: real estate, construction, gems and jewellery, cement, and to some extent, housing finance companies. These sectors may continue to bleed as they are dependent on black money, say analysts.
In the wake of demonetisation, the consumption-oriented sectors have been hit hard. “Auto and fast moving consumer goods (FMCG) will be affected only for the short term. They will be back on track by January or latest by February end. It’s the right time to scout for opportunities in these stocks,” says Sanjiv Bhasin, executive vice president-markets and corporate affairs, IIFL. Public sector banks are also an attractive bet in the current scenario. The Nifty PSU Bank Index is already up 9.75 per cent in the past one week. Investment managers say demonetisation could lead to rate cuts and also boost their current account and savings bank account (CASA) ratios. There is a need, however, to sick to better-quality PSU banks and avoid those with NPA problems.
Wealth managers say that mutual fund investors should not worry about the market correction and not stop their systematic investment plans (SIPs) under any circumstance. They should hold large-cap funds at the core of their portfolio and have only a 20-30 per cent exposure to mid- and small-cap funds in their portfolios.
Falling interest rates will be positive for debt funds
Post demonetisation, there is widespread expectation that interest rates may soften. Says Murthy Nagarajan, head-fixed income, Quantum Mutual Fund: “This could improve tax compliance and increase the government's tax collection. It will also keep prices in check as the ability to hoard commodities and other assets will reduce greatly . This is a long-term positive for the debt market and may lead to repo rate cuts of 50 basis points."
Medium- to long-term debt funds stand to benefit from the possibility of further rate cuts. "A lot of money had moved out of longer-term debt funds over the past six months. Investors may look at their allocation to these funds and reallocate some money there," says Kaustubh Belapurkar, director-manager research, Morningstar Investment Advisor India.
Some experts, however, believe that it is by no means certain that interest rates will decline. "A large part of the money that is flowing into the banking system is likely to flow out again once the limitations on withdrawal are lifted, since this is working capital needed by businesses," says Manoj Nagpal, chief executive officer, Outlook Asia Capital. He adds that the government's mints are struggling to replace the Rs 500 and Rs 1,000 notes that have been taken out of circulation. "If the current currency shortage persists, people will spend only on essentials, which could lead to a spike in core inflation. If that happens, the expected rate cuts may not materialise in the short term," adds Nagpal. He believes this scenario has a 25 per cent probability.
Given these contrary viewpoints, investors should allocate money largely to liquid and short-term debt funds. Only those with the requisite risk appetite should take exposure to longer-term funds. Take this exposure through dynamic bond funds.
Among other fixed-income instruments, look to lock into current rates. Tax-free bonds purchased from the secondary market, Public Provident Fund, Senior Citizens Savings Scheme, Sukanya Samriddhi Yojana and longer-term bank and company fixed deposits (of more than three years) are a few options that are attractive today.
Good deals for property buyers
In the short term, demonetisation is expected to result in lower transaction volumes as buyers put their decisions on hold to see if prices will correct. "Among developers, the better brands, the larger ones with deep pockets, those receiving institutional money and those with projects nearing completion may be able to hold on to their prices or may not see large fluctuations in sales price," says Tejas Patil, head of real estate services, Sanctum Wealth Management. The situation of leveraged developers is likely to turn precarious. "They may be forced to reduce prices to maintain their sales velocity as they need to service their loans," he adds.
Those segments where there was a huge gap between the sales value and the circle (or ready reckoner rate), with cash being used to fill the gap, are expected to take the biggest hits. Land and luxury properties are two such segments. "Developers will have to reduce prices of luxury properties or wait for buyers who can borrow significant amounts to purchase them," says Patil. According to Kanika Gupta Shori, chief operating officer and co-founder, SquareYards, "In secondary markets and in tier II cities, where cash transactions were common, volumes are expected to fall."
In the medium term, the pain may abate. With banks coming in npossession of more funds, home loan rates may inch downward. Along with a price correction, this may provide a fillip to sales.
In the long term, the recent developments are positive for the sector. Once RERA regulations are in place, they will provide greater protection to buyers. Less availability of black money will mean that prices will respond to actual demand, instead of remaining artificially propped up.
Stick to quality developers with a track record for timely completion of projects. Prefer properties that are almost complete. Avoid financially weak developers. One view is that if you have not finalised a deal, wait for some time for clarity to emerge on prices. This may take three-six months.
Shori has a different point of view. "Proceed with your buying process but with more caution and more research. You can get very good deals due to the current uncertainty. If a property is worth the price, go for it. If you wait for the instability to end, prices may pick up, especially in end-user driven markets," she says.
Gold prices may correct
To a large extent, the price of gold is determined by international events. In the coming months, there are negative triggers due to which the yellow metal may see a correction. The primary among them is the expectation that the US Federal Reserve may raise interest rates in December. Thiagarajan, director at Commtrendz Research, says that depending on rupee movement, gold could even fall to Rs 26,000 per 10 grams in the short term.
Gold acts as a hedge in a portfolio. Buy the metal now only if it’s absent from your portfolio. Ideally, one should allocate 10-15 per cent to it in one’s portfolio. The best way to take exposure to the metal is through sovereign gold bonds (SGB), where you get one gram of gold at the wholesale price and also have an opportunity to earn a return of 2.5-2.75 per cent annually. “The government comes up with SGB scheme periodically. Invest small sums in each tranche over time,” says analyst Bhargava Vaidya of B N Vaidya Associates.
Correction has thrown up buying opportunities
The equity markets are down five per cent since the government announced currency demonetisation. Returns of all equity mutual funds are in the negative since then. Mid- and small-cap funds are down by 7 and 7.94 per cent respectively while large-cap funds have fallen 5.29 per cent. Sectors such as real estate and automobile have been worst hit, with their indices falling 20.23 per cent and 11.5 per cent respectively.
Investment managers are of the opinion that the markets are overreacting to this event. While some sectors may continue to be impacted by demonetisation, the market correction has also thrown up opportunities to buy good stocks at reasonable valuations in others. “While demonetisation led to a correction, you also have to realise that mid- and small-cap stocks were in a bubble zone and waiting for a trigger to correct,” says G Chokkalingam, founder, Equinomics Research & Advisory.
Direct stock investors should stay away from sectors directly impacted by demonetisation: real estate, construction, gems and jewellery, cement, and to some extent, housing finance companies. These sectors may continue to bleed as they are dependent on black money, say analysts.
In the wake of demonetisation, the consumption-oriented sectors have been hit hard. “Auto and fast moving consumer goods (FMCG) will be affected only for the short term. They will be back on track by January or latest by February end. It’s the right time to scout for opportunities in these stocks,” says Sanjiv Bhasin, executive vice president-markets and corporate affairs, IIFL. Public sector banks are also an attractive bet in the current scenario. The Nifty PSU Bank Index is already up 9.75 per cent in the past one week. Investment managers say demonetisation could lead to rate cuts and also boost their current account and savings bank account (CASA) ratios. There is a need, however, to sick to better-quality PSU banks and avoid those with NPA problems.
Wealth managers say that mutual fund investors should not worry about the market correction and not stop their systematic investment plans (SIPs) under any circumstance. They should hold large-cap funds at the core of their portfolio and have only a 20-30 per cent exposure to mid- and small-cap funds in their portfolios.
Falling interest rates will be positive for debt funds
Post demonetisation, there is widespread expectation that interest rates may soften. Says Murthy Nagarajan, head-fixed income, Quantum Mutual Fund: “This could improve tax compliance and increase the government's tax collection. It will also keep prices in check as the ability to hoard commodities and other assets will reduce greatly . This is a long-term positive for the debt market and may lead to repo rate cuts of 50 basis points."
Medium- to long-term debt funds stand to benefit from the possibility of further rate cuts. "A lot of money had moved out of longer-term debt funds over the past six months. Investors may look at their allocation to these funds and reallocate some money there," says Kaustubh Belapurkar, director-manager research, Morningstar Investment Advisor India.
Some experts, however, believe that it is by no means certain that interest rates will decline. "A large part of the money that is flowing into the banking system is likely to flow out again once the limitations on withdrawal are lifted, since this is working capital needed by businesses," says Manoj Nagpal, chief executive officer, Outlook Asia Capital. He adds that the government's mints are struggling to replace the Rs 500 and Rs 1,000 notes that have been taken out of circulation. "If the current currency shortage persists, people will spend only on essentials, which could lead to a spike in core inflation. If that happens, the expected rate cuts may not materialise in the short term," adds Nagpal. He believes this scenario has a 25 per cent probability.
Given these contrary viewpoints, investors should allocate money largely to liquid and short-term debt funds. Only those with the requisite risk appetite should take exposure to longer-term funds. Take this exposure through dynamic bond funds.
Among other fixed-income instruments, look to lock into current rates. Tax-free bonds purchased from the secondary market, Public Provident Fund, Senior Citizens Savings Scheme, Sukanya Samriddhi Yojana and longer-term bank and company fixed deposits (of more than three years) are a few options that are attractive today.
Good deals for property buyers
In the short term, demonetisation is expected to result in lower transaction volumes as buyers put their decisions on hold to see if prices will correct. "Among developers, the better brands, the larger ones with deep pockets, those receiving institutional money and those with projects nearing completion may be able to hold on to their prices or may not see large fluctuations in sales price," says Tejas Patil, head of real estate services, Sanctum Wealth Management. The situation of leveraged developers is likely to turn precarious. "They may be forced to reduce prices to maintain their sales velocity as they need to service their loans," he adds.
Those segments where there was a huge gap between the sales value and the circle (or ready reckoner rate), with cash being used to fill the gap, are expected to take the biggest hits. Land and luxury properties are two such segments. "Developers will have to reduce prices of luxury properties or wait for buyers who can borrow significant amounts to purchase them," says Patil. According to Kanika Gupta Shori, chief operating officer and co-founder, SquareYards, "In secondary markets and in tier II cities, where cash transactions were common, volumes are expected to fall."
In the medium term, the pain may abate. With banks coming in npossession of more funds, home loan rates may inch downward. Along with a price correction, this may provide a fillip to sales.
In the long term, the recent developments are positive for the sector. Once RERA regulations are in place, they will provide greater protection to buyers. Less availability of black money will mean that prices will respond to actual demand, instead of remaining artificially propped up.
Stick to quality developers with a track record for timely completion of projects. Prefer properties that are almost complete. Avoid financially weak developers. One view is that if you have not finalised a deal, wait for some time for clarity to emerge on prices. This may take three-six months.
Shori has a different point of view. "Proceed with your buying process but with more caution and more research. You can get very good deals due to the current uncertainty. If a property is worth the price, go for it. If you wait for the instability to end, prices may pick up, especially in end-user driven markets," she says.
Gold prices may correct
To a large extent, the price of gold is determined by international events. In the coming months, there are negative triggers due to which the yellow metal may see a correction. The primary among them is the expectation that the US Federal Reserve may raise interest rates in December. Thiagarajan, director at Commtrendz Research, says that depending on rupee movement, gold could even fall to Rs 26,000 per 10 grams in the short term.
Gold acts as a hedge in a portfolio. Buy the metal now only if it’s absent from your portfolio. Ideally, one should allocate 10-15 per cent to it in one’s portfolio. The best way to take exposure to the metal is through sovereign gold bonds (SGB), where you get one gram of gold at the wholesale price and also have an opportunity to earn a return of 2.5-2.75 per cent annually. “The government comes up with SGB scheme periodically. Invest small sums in each tranche over time,” says analyst Bhargava Vaidya of B N Vaidya Associates.