Investing game plan - 2017

It has ‘over-weight equity’ written all over it

The year 2017, for the most part, is likely to be an extremely eventful year. The concrete effects of demonetisation will be reflected in the last quarter results starting mid-January, and then followed by an early Budget, then some key state elections and all of this with an overlay of uncertainty emanating out of the new policy dispensation in the US and tightening monetary policy by the Fed. A bit early to say, but closer home a few trends are likely to emerge.

Black or white, accounted or unaccounted, old or new, basically all the currency stashed under peoples’ pillows and in their safes is back into the bank. This is bound to keep liquidity high, interest rates low, and improve the transmission of policy.

While everyone is focused on the existing stock of black money and how much gets destroyed, it is clear that the government will end up with a wealth of data. Even if no money is “destroyed” they will likely be in a position to tax their way to success.

The tax base is bound to widen, tax collections likely to surge and the government will turn to being a big investor in the economy and in social as well as hard infrastructure, at least for the next couple of years. Coupled with demonetisation and the imminent implementation of GST, business in some sectors is likely to move from “unorganised” trade to “organised” players, resulting in benefits to listed companies.

While some segments of consumption will see postponement as well as demand destruction, some will bounce back as currency availability normalises and low interest rates and an imminent government stimulus package kick in to jump-start demand.

With interest rates at decadal lows, the pronouncements of Modi making hoarding of real estate and gold very uncool, and the new-found penchant for all things digital and cashless there is a TINA factor driving flows into equities. Twenty years back when a youngster started earning, she was guided by parents to open a PPF account and visit the State Bank or the nearest post office – capital market participants like myself spent a good part of our careers competing with the Government of India which offered as high as 9-11 per cent tax-free and, of course, risk-free returns on various instruments.

There was no reason of venturing into the capital markets other than for academic discussions. Not any more. Today, when a youngster starts earning, she is guided to open an SIP into an equity mutual fund. With ₹3,900 crore a month of fixed inflow, equity mutual funds are matching FII flows and I am quite confident by the end of 2017, this flow will be near ₹6,000 crore a month.

The gameplan for 2017 has “over-weight equity” written all over it. Don’t worry about turbulence in early 2017, we are starting with very low expectations, reasonable valuations and a great amount of tentativeness. Increase equity allocation at every opportunity, starting now.

The author is MD & CEO, Motilal Oswal AMC

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