How to Preserve and Grow Wealth in 2017

Tracey Nearmy/AAP

By

Siddhartha Rastogi

2017 comes on the backdrop of four major changes the world had not before seen in the 21^st century.

Rising Nationalism in Europe – Brexit, which might be followed by Nexit, Frexit and Swexit in months and years to come. Geert Wilders of the Dutch Far Right Freedom Party and Marine Le Pen of the French Far Right – National Front Party have seen a surge in popularity on account of anti EU and anti immigration rhetoric. Far right parties emerging victorious in respective national elections would mean more voices to disintegrate the EU and eventually the fall of single currency Euro, perhaps by year end itself.

Protectionism and trade, tariff wars led by the Trump Administration – Against all media polls, Trump got elected as the President of the world’s largest economy which has been struggling for years to come out of recession and low growth. Trump’s initial disregard for all global trade pacts and international treaties and agreements to bring more value and benefits to the US would see a surge in the protectionist regime by various nations across the globe. This would mean companies which sustain and thrive on domestic demand would attract smart money from investors.

Rising Interest rates in the West – Janet Yellen increased 25 basis points in US interest rates, second move, higher since June 2006. Also she indicated that three more hikes of 25 basis each are in the offing for calendar year 2017, a lot of which depends on Trump’s plan on cutting taxes and boosting the economy with his trillion dollar Infra spending project. It’s important to note here that Ms Yellen would be in office till at least January 2018 and Trump particularly does not share great relations with Ms Yellen. Trump has publicly mentioned, “She’s keeping them artificially low to get Obama retired. Watch what is going to happen afterwards. It is a very serious problem. And I think it is very political.” Whatever the outcome of this slugfest, one thing is clear, the global bond party is over.

Slowdown of Growth in Emerging Markets – China and India, once growth engines of the World, seem both to be slowing down. China’s GDP growth has seen a sharp decline over the quarters; this accompanied by asset bubble, huge domestic leverage, and continued RMB depreciation has led to massive capital outflows. In Q3 2016, China saw a record capital outflow of 206 Billion USD, subsequently State Administration of Foreign Exchange in China has put restrictions on taking out USD 5 million or more for all Chinese companies. The second most populated country in the world and the fastest growing economy is set to witness massive headwinds due to the unprecedented move of demonetization from the government. Partially driven by political compulsions and partially by Modi’s agenda to crackdown on black money, demonetization will derail the economy from a GDP growth of 7.50% to 2.50% till 2^nd qrt of 2017.

The important question arises how should global and domestic Indian investors deal with these uncertainties and grow their wealth?

Global investors who have reach and access to global financial markets and global asset classes, should continue investing in US Equities. The party in US markets will continue for the first half of 2017. Immediately after assuming office, Trump should give sops for driving consumption and take measures to boost employment, rejigging tax rates which would benefit stocks driven by domestic demand. Also lenders/ the banking sector in the US will see increased revenue with the hike in lending rates.

USD will continue to strengthen against the basket of currencies on the backdrop of uncertainty in Europe and emerging markets. This would keep bond traders afloat till the next interest rate hike in US, which is expected somewhere in July 2017. Commodities will continue to rise for the first half of 2017, on the perceived demand from the US for its massive nation building project.

In the first half of the year, emerging market equities and debt will continue to underperform on account of structural issues with the economy and a lack of ability to cut interest rates due to the uncertain interest rate regime of the west.

Gold will continue to be laggard with the USD continuing to remain buoyant. US real estate will continue to surge until a further rate hike happens. European and London real estate should continue to face pressure and one should stay away from it until the last quarter of 2017. Look for distress opportunities by the end of 2017 and you would get plenty to invest in.

In a nutshell, for Global investors, Go Long on US equities – Consumption, financials, commodities and short emerging market equities for first 6 months. For Second half neutralize shorts and go long on emerging market equities and book profits in US equities. Stay away from bond markets for 2017. For conservative investors, buy short term emerging market non government, good credit corporate bonds.

For Indian investors, sell equities now and wait for a correction in the market by approx 8 -10 % from current market levels (Nifty @ 8400). Long term investors who can ride the volatility of two quarters should stay invested. Avoid fresh allocations. Post market correction; enter stocks which are market leader with 2 years horizon. Consumer demand would come back in two quarters and biggest beneficiaries would be the leaders in each sector as marginal and unorganized players will get wiped out due to lack of cash and regulatory arbitrage which they were enjoying for decades.

For conservative Indian investors, stay away from GSEC, gilts and TBills, look for quality corporate credits on the Fixed income space. As against the street expectation, far and few rate cuts would be seen from RBI’s basket on the concern of rising global interest rates, hence look for duration not over 3 to 3.50 years and mainly in corporate bonds. Don’t venture in the longer end of the yield curve. Negative surprise awaits there.

Gold will yield 3 -5 % returns during the year on account of currency movement. Hence it should only be bought as hedge against uncertainty which the world might experience in short term due to the fall of the Euro. Apart from love of holding gold, one should avoid it in 2017.

Real Estate – RERA and demonetization will bring down investment demand and ensure serious end users enter the real estate market. Slow down will be witnessed in resale and primary offering from the developers mainly in the luxury segment with ticket sizes above INR 2 Crores. Last quarter of 2017 would witness pent up end user demand emanating from mid housing segment accompanied by lower home loan rates and bounce back in economy. Thus 3^rd quarter is the best time to negotiate and close the real estate transactions mainly for self usage.

Summarizing for domestic Indian investors, tank up consumption, pharma and PSE stocks by the end of 2^nd quarter of 2017, as second half and 2018 would be the most promising years for Indian equities. Go for midcaps rather than large caps. (India being a bottom up market will see survivors of demonetization mayhem turning into multibaggers).

Siddhartha Rastogi

Siddhartha was born to a learned middle class educated family in Semi Urban India. His father was an extremely honest man who because of his honesty had to pay the price in corporate world. Mother is a determined woman who ensured that children are being well taken care off. After a few years of birth, doctors called Siddhartha, a slow child having flat foot. He would fall more than he could walk. Determined mother ensured all therapies for her son to come out strong to fight the world. Siddhartha joined swimming when he was in 6th standard. Seeing other children of his class, he jumped in 10 feet deep pool and learnt swimming on his own, the very same day.

From that day there was no looking back. He topped his city in 12th and went to score highest in his B school exams. During his profession as banker, he became youngest branch manager of a MNC bank managing their biggest wealth branch in the country. There he found love of his life and got married. His love of his life emerged in the form of his daughter who completely changed him for good.

Siddhartha Rastogi is Director for a boutique Investment bank in India.

Siddhartha is a forward looking thinker & writer who has written a book on decision making. 8 Simple steps to effective decision making.

He writes on various social and current issues via his blog and can also be found on twitter.