Demonetisation has changed expectations on virtually every single factor relating to investment outlook. While no one is clear about anything, the one thing everyone sees is a sure slowdown. The magnitude of decline varies by a wide range. The fact is this is totally uncharted territory. Precedents of demonetisation in other countries have no relevance. Most demonetisations happened due to hyperinflation. Here, the inflation is to target black money as the first strike. So the outcomes or precedents do not bear any relevance.
Given that we are in uncharted waters, our investment strategies get stuck. Our thoughts get frozen and refuse to move ahead. Most people I talk to are in a protective mood and would even like to stop their SIPs (Systematic Investment Plans). They are saying that they would like to resume the SIPs after there is clarity and optimism. There are some who are saying that this is a great time to buy and would like to add a lump sum purchase in addition to the SIP they are already committed to. Investors in Direct Equities are a mixed lot. Some want to buy those stocks that have fallen the most.
To put things in perspective, let us look at the markets and the economic environment in general. Before the demonetisation, our markets were not cheap. Given that earnings were sluggish, there was a premium put on expectations. So, in a sense, investing at that point in time made prospective returns low. So a good correction means that investing in equities become more rewarding.
It is important to understand that the demonetisation is only the first step by the government in its war against black money. More things are in the pipeline. In a sense, it will mean that the economy as it works today, will be disrupted further. And what disruption means is more uncertainty. So there are more shocks in the pipeline and the worst for our markets may not be over yet. And on the global front, we do not know whether the world is healthy enough and their view on India is good enough to keep the FPI money inflows. FPIs in the ten days after demonetisation have sold just around $3 to $4 billion of equity and this has created a continuous fall. Our vulnerability and dependence on these flows is a fact.
What do we do next?
1. For those who cannot stomach the volatility of the equity markets, it is good to lock-in to fixed income instruments. It is very likely that in six months, we can see interest rates lower by one to two percentage points. It also means that if it is a fixed income fund, you could get capital appreciation. There is no point keeping money in savings account wondering what to do next.
2. If you are investing through SIPs, please continue. Do not stop. Yes, markets may decline. But does it mean you know when to start again? And do not make the mistake of selling out what you have and starting a fresh SIP. You will miss the long-term returns of a market. You will just end up confused. Do not stop your existing SIPs.
3. If you invested in fixed income products (income/bond funds, debentures, etc), stay invested. There is no need to change. These products will gain as interest rates fall.
4. If you are already into direct equities, do not panic so long as the fundamentals have not changed. Yes the companies could face some dips in one or two quarters or some sell off by institutional investors will see price falls that could be sharp. Do not disturb the portfolio simply because of a market reaction.
5. Hopefully, this is also a good window for those who want to be in direct equities to make a beginning. Make a short list, put 'desirable' buying prices against each and start off. Do not buy all in one go. Spread it out in maybe three parts or so.
The important thing is to have a plan in mind. Do not change your mind again and again based on the last person you met or the last column you read. You start with the assumption that there is going to be volatility. Things can get bad for sometime. It will get back to normal. No expert has an answer. This is new territory for every one. All we are talking about is probabilities and not certainties. Ultimately, this will pass. GST will also get implemented. Tax compliance increase would mean better transparency. And demand may go slack for some time, but it will come back. Government is capable of softening the impact by big infrastructure spending and reduced tax burden etc. Falling interest rates will revive business sentiments. So demand will bounce back. And equities will not go out of fashion.
