Manage Uncertainty through Disciplined, Systematic Investment

Smart-Investments

2016 was a difficult and tumultuous year for the Indian stock market. Globally, it was a typical ‘black swan’ year that saw unexpected events impacting the markets. Brexit and the election of Donald Trump as the US President were events that global markets did not anticipate. Demonetisation was another classic ‘black swan’ event that took everyone by surprise. The consequences of these events are yet to play out. This element of uncertainty, which plagued the markets in 2016, is likely to linger on to 2017 as well. What should investors do in these uncertain times?

How Brexit unfolds in 2017 will be crucial. If it is a hard Brexit, it will be a major challenge. Donald Trump’s maverick policies might add to the uncertainty. Trump’s plan to invest massively in US infrastructure, if implemented as promised, will be a huge programme that will impact the global financial system. This massive fiscal stimulus will be inflationary and therefore, it is quite probable that US interest rates would move up, as already indicated by the Fed. This will strengthen the dollar, which, in turn, will attract huge capital flows into the US and will have negative consequences for emerging markets.

The performance of the Chinese economy will also be crucial. How China will manage its lowest growth rate in 25 years will be watched with a lot of interest in global financial markets. Particularly, the world markets will closely monitor the issues in the Chinese bond market and the movement of Yuan. Any hard landing in China will be problematic for global markets.

In India, the consequences of demonetisation will continue to influence markets. The market has perhaps discounted the expected decline in Q3 and Q4 GDP growth rates and corporate earnings. But it is difficult to say whether the market has fully discounted the consequences since we are still in uncharted territory as far as growth and corporate earnings are concerned. There are other issues like the timeline for the implementation of GST and the fallout of the elections in crucial states like UP.

The budget is likely to be a major event of 2017. It would be reasonable to expect reduction in personal income tax rates and tweaking of the slabs. Reduction in corporate tax, as promised in earlier budgets, is also a distinct possibility. The combination of fiscal stimulus through the budget and monetary stimulus through rate cuts can succeed in kick-starting investments in the economy. The budget, if it turns out to be an imaginative one, can be a trigger for the market.

In these uncertain times, the best investment strategy is to stick to disciplined systematic investment. During the last 36 years, stock market returns (as measured by the index) have been above 15 per cent annually. These tax-free returns are far superior compared to returns from competing asset classes. This out-performance by equity will continue in future, too. Investors need to do only one thing: continue to invest with discipline in quality stocks and invest in equity/balanced funds through SIPs (Systematic Investment Plans). Patient, disciplined investment will be handsomely rewarded.

 

(The author is Investment Strategist, Geojit BNP Paribas)