Writing about the hottest topic could be a difficult job. Many things are already being “analyzed” and discussed all around.
Since this space is among the favourite platform of its readers for Personal Finance, I will try and keep away from talking about the politicization of this move. As usual, we will stick to the WIIFM (What's in it For Me?) principle.
We have just picked up some asset classes and we will see how do they get impacted in the short term and in the long term due to Demonetisation.
Short Term: In the Short term, cash liquidity has dried up from the market, whereas banks seem to be flooded with Cash (mostly old currency). This currency can (hopefully) be used by banks as CRR when they give it to RBI.
This will bring down the immediate liquidity requirement of the banks which will push them to reduce interest rates on FDs.
Loan becoming cheaper in the short term could be difficult as they ideally need to use the new currency for disbursement to people waiting to withdraw.
Long Term: In the Long term, when most of the cash holdings (I am sure most of us would agree that all cash still won't come in banking system) are in banking system, we could see loans becoming cheaper.
Strategy : This could mean lower interest rates will be offered across various fixed income instruments like FD, PPF, G Sec, Post Office etc. A fall in interest rates could very well benefit investments in Debt Funds. Thus, whoever is willing to invest from a 1-3 years time frame, can start looking at Debt funds.
2. Forex / USD
Short Term: Some big cash hoarders (whether black or white) are also trying to convert their old currency into USD or other Foreign currencies. This has pushed up demand for dollar and thus we are seeing the dollar appreciating. Among other factors, an anticipation of hike in Fed rates is also putting pressure on FIIs to sell which is again pushing up demand for dollar. Thus, we could see dollar continuing to appreciate in short term.
Long Term: Assuming that a substantial chunk of cash (in Indian Rupee) will be destroyed as we see lot of incidences of people burning old currency etc, we can again see a bounce bank in rupee to some extent. Fundamentally, as long as there is a difference in inflation rates of India and US, the rupee will continue to depreciate by 4-5% p.a. so as to keep our exports competitive. But the additional fall which we see in the short term, might get reversed to some extent in the medium to long term.
Strategy: Those planning to “invest” in dollars need to be cautious or be happy with a 4% p.a. kind of returns.
Short Term: Similar to dollars, some cash hoarders queued up to buy gold and the prices started rocketing. However, there have been fear propagated (both genuine and fake) that Gold also might get traced and could be a cause for trouble for those holding Gold in unreasonable quantities.
Long Term: There seem no other fundamental reasons for Gold to rally at an unreasonable rate. In fact, those who are buying Gold at 40-50% premium could be stuck with it as the spike might subside in the medium to long term.
Strategy: Gold can continue to be a 10% part in your portfolio. Also, from a long term perspective, you should be regularly investing in Gold irrespective of the price levels. Timing the Gold prices can go both in favour or against you. Better to be a regular investor with a long term view.
4. Real Estate:
Short Term: Real Estate is usually believed to be the favourite “parking space” of black money hoarders. There are possibilities that Real Estate sales start happening in this period (till 30th December) wherein hoarders of black money hastily buy properties, thinking that this will help them to get rid of the black money held in old currency. This could cost them a premium as the sellers also know their weakness.
Long Term: With lot of money coming into the system and black money reducing to a great extent, the artificial demand of Real Estate will dry up. The natural demand will prevail which may not yield ultra-high returns (as seen few years back). In fact, those buying real estate in haste in the short term, will be stuck with it for quite some time. They can just psychologically console themselves that they saved some tax and penalty.
Strategy: Don’t buy useless properties to dump black money. Few years later, you will realise that to save 40-50% tax, you bought a property at an unreasonable price, and you might take years to get rid of it. Instead, paying tax could turn out to be a better option. For future, you can start investing in instruments which give you good returns and still don’t increase your tax liability.
Those with genuine white money, can wait for some time as we could see a 30-40% drop in property prices.
Short Term: In Short term, there could be confusion and panic which could mean negative returns / flat returns in equities. Also, due to dynamic changes happening, any news can see overreaction by the markets. Even fundamentally, consumer spending can be lower due to lower availability of cash. This could impact the quarterly results of the companies in short term.
Long Term: In Long term, we can expect more rationalization of taxes which could increase corporate profitability. Also, the additional taxes mopped up due to demonetisation could either be used for higher infrastructure spending or to lower the taxes (hopefully). This would mean more post-tax money with the people resulting more money being invested in equities.
Strategy: Equities anyways shouldn’t be used for short term investments. Those with long term time horizon, can start investing in equities. If one doesn’t have an expertise for equities, seeking professional help would be helpful.
6. Cash (in Indian New Currency):
Short Term: There could be a natural question that why shouldn’t I hold a lot of cash (in new currency) rather than investing it here and there. In the short term, you may not have this option very easily as it will take some time for the new currency to circulate in abundance.
Long Term: This Demonetisation could be a wake up call for those who are traditionally habituated to hoard lot of cash. We never know if after 3-4 years, the new note of Rs. 2,000 might also be declared invalid (I don’t have any authorized news about this. It's just my own hunch looking at the paper quality of the new note, that it is not made to last too long). In that case, your entire exercise could be prove futile.
Strategy: Cash anyways keep losing its value due to inflation. We need to just keep a bare minimum cash needed for our household expenses (plus a little amount for emergencies). But just piling up cash is going to be a big pain as we move towards a more transparent and cashless economy.
Overall, Demonetisation could be big game changer for the Indian Economy. Whether the game changes for our good or bad, depends on how wisely we take our investment decisions.
We look forward to your valuable comments and feedback.
The Author Prof. Saurabh Bajaj (BE, MBA, FRM, CFGP) is CEO with Nidhi Investments, Mumbai and can also be reached at CEO@nidhiinvestments.com.
Disclaimer: The above points and suggestions are personal opinion of the author. They may differ in application from person to person. Please consult your financial advisor before making any investment decisions.
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