TINA factor: equity is where you should put your money
Demonetisation impact will be for a limited period..say a maximum of 3-5 months; its effect will be more of a short term pain but long term gain. While estimates of demonetisations impact on GDP vary from 1 per cent to 4 per cent points, we think it will be more towards the lower number. Two wheelers and consumer durables purchases have seen some postponement. This could resume soon as disposable income has gone up after Seventh Pay Commission / One Rank One Pension pay outs started last year.
Already our dipstick in states like Punjab and in Hyderabad shows that customers have started depositing the new notes in the banks, a clear sign of rising money circulation in the system.
US President Donald Trump taking charge at White House on January 20 is an important event to watch out for. We have to see how far and how soon President Donald Trump will implement the promises of presidential candidate Trump, Our net export exposure with US is very small and hence to that extent India will be less impacted by protectionist policies if expanded by Trump.
GST roll out is a big event after demonetization; it should happen from July 2017. In what final form it will be implemented needs to be watched. GST will add 1 to 2 per cent points upside to GDP growth though it will come with a lag effect of 4-6 quarters. Tax to GDP ratio needs to rise as GST is rolled out.
FPI inflow into India has been negative first time in 8 years in 2016 for equity and debt markets combined but positive for equities alone. Also India had in 2016 received the highest FDI inflow in the last decade.
Whenever the equity market returns have been flat or negative for preceding 2 years, historically we have witnessed a better performance in the third year. With more disposable income/wealth reflected in the bank accounts, there is no alternative (TINA) to equity, as in real estate there is hardly any liquidity and returns expectations are uncertain, in fixed income products the interest rates are very low while gold may give only single digit return. Even senior citizens are now looking for equity instrument exposure with low volatility (in schemes like Hybrid equity schemes).
The year 2017 will also have some big initial public offerings from SBI Life Insurance, UTI Asset Management, Vodafone, BSE and NSE which may attract new investors into the markets and provide an opportunity for listing gains for the investors.
For 2017, we are bullish on information technology, pharmaceuticals and infrastructure sectors. A strong dollar and US macro revival will spur IT spend by cash rich banks and corporates abroad. Pharmaceuticals are currently reeling under regulatory crackdown.
Valuations of some pharma companies are running lower than multiyear averages, even as product filings stand at a multiyear high. Trump’s emphasis on reducing healthcare costs could lead to faster approvals for generic filings.
In the infrastructure space pure play EPC companies in road, power transmission, ports, railways, urban infra look attractive as public sector order flow is set to rise on a high base.
The writer is MD and Chief Executive Officer, HDFC Securities