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Investment Lessons For 2017

Accrual strategy with improving balance sheet of quality companies would also find takers in 2017. As inflation stays stable and dollar strengthens, commodities especially gold should be avoided

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This could be the year of reckoning forIndia. Though the euphoria post Modi’s election has moderated, the government has continued to under-take structural reforms, over the last two years whose benefit should be visible from 2017 onwards. However, we continue to grapple with issues that could impact short-term momentum.

Domestically, the demonetisation shock is still reverberating. The GST implementation and key state elections, especially in Uttar Pradesh, could impact the direction of government policy. Easing inflation and stable external balance should result in a more accommodative policy on both monetary and fiscal front in 2017.

Globally, markets are aligning to a reflationary tilt on the back of policy divergence with US guiding for higher rates and expansionary fiscal policy, while ECB and BOJ continuing to expand their balance sheet. Emerging markets assets could remain under pressure in such a scenario as the dollar further strengthens.

Given this, we expect equities to deliver strong returns in 2017 after posting lackluster benchmark returns over the last two years. The earnings cycle is bottoming out post four years of subpar earnings with earnings expectations upwards of 15 per cent for FY18, which is likely to be achieved, compared to the past. First, we should see higher rural and urban demand driven by a good monsoon and government pay commission payouts. Second, accommodative fiscal and monetary policy would drive sentiment back up post remonetisation. Third, the multiplier and follow-on effects of government spending on capex coupled with GST implementation would boost government revenues. And last, stronger growth prospects of the developed world would bode well for our exporting sectors.

A case also exists for multiple re-rating as falling interest rates support equity valuations with current 12-month forward earnings trading below 16x, the 10-year long term average. Bottom up stock picking and domestic themes would continue to deliver superior returns as has
been the case over the last few years.

The right equity strategy would be higher allocation to large cap and PMS-es focusing on investing in companies with resilient earnings growth and strong balance sheets.

Fixed income markets, especially the duration trade has worked very well in 2016 as 10-year G-Sec yield touched seven-year lows of 6.5 per cent. With inflation likely to be within RBI’s target of 4 per cent, fiscal prudence continuing as government garners higher tax revenues through GST/income disclosure schemes and system liquidity to be sufficient resulting in better transmission of rates, scope for another 50bps reduction in interest rates exist.

This would keep investors interested in the duration trade. However, at levels below 6 per cent investors may look to book profit and move into shorter duration funds. Accrual strategy with improving balance sheet of quality companies would also find takers in 2017. As inflation stays stable and dollar strengthens, commodities especially gold should be avoided.

Real estate has seen time value correction in the recent past and with demonetisation and the implem-entation of the Real Estate Regulator Bill, regulation will tighten indicating some more pain in the next year.

Investors should focus on financial investments rather than direct investment especially in the mid income residential space given the likelihood of lower interest rates and prices. Overall, the coming year could turn out to be pivotal in achieving India’s long-term potential of sustainable economic growth.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Rajesh Saluja

The author is CEO and MD, ASK Wealth Advisors

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