Finally, after a long gruelling campaign, the General Election result is out. The resounding mandate for NDA/BJP has set the stage for strong stable government for the next 5 years. The majority in both houses (Lok Sabha and Rajya Sabha) will enable the government to push through tougher legislations.
Modi’s first five year had mixed results. While, the government brought in some key structural changes including DBT, GST, RERA and IBC, the Indian economy has largely seen jobless growth.
The current economic environment is tough. In India, the consumer demand is slowing down and the job growth is muted. Globally, US-China trade war, sanctions against Iran, and directionless UK’s brexit is putting pressure on the global economy.
In the backdrop of these challenges, having a stable government with decisive mandate is a welcome news. This is a wonderful opportunity for the NDA government to bring the transformational economic reforms to push India into the next growth trajectory.
What are some of the challenges facing our economy?
At local level in India, the liquidity is a challenge for NBFC because of the various issues over last one year. While Bank NPA is being brought down, it is still very high and banks need re-capitalization. The consumer demand has come down over last one year and the private investments have not picked up. “Make in India” campaign had limited success. Jobs are hard to come by; our youth need to be engaged in economy in meaningful ways for better future.
Global economy is going through its own challenges. US is promoting restrictive trade practices and US-China trade war is becoming serious. Sanction against Iran will increase the price of Oil which is the biggest import expense for India, which in turn will increase inflation for us.
What should be the immediate focus of our government?
There are some clear issues which need urgent attention by the government. The liquidity in the financial sector and recapitalization of the bank needs to be done immediately. The NPAs need to be brought down quickly in a timely fashion. The disinvestment of the public sector companies can provide much needed capital. The interest rate needs to be brought down to decrease the cost of capital for corporate sector. In the long term, the government can bring in tough legislations including land and labour reforms.
How will the Indian Equity economy shape up in coming years?
The market will welcome on boarding of a stable and decisive government which can take tough decisions. The first year is crucial for government to move quickly and take some important decisions to get the economy back on track. Post that, the government may like to take the advantage of absolute majority in both the houses and move the aspirational reforms including land and labour. If implemented, that will be a strong positive for the Indian economy and equity market. Please note that during this period, the Indian economy may face headwinds from slow global growth and restrictive trade practices globally.
What should your investment approach be in this scenario?
Bottom line, directionally we are in the upward market and at minimum the market return will beat the return from all others asset class in coming 5 years. Follow, the basic approach of asset allocation aligned to your risk profile to finalize the allocation for equity. Do periodic contribution to the equity through index fund / ETF / mutual funds. Don’t stay glued to your portfolio because that may motivate you to place the trade to time the market, which nobody has been able to do profitably. Follow the boring approach of two reviews every year to align the equity portfolio for minor adjustments. Remember, you are investing in Equity to get a return in line with market performance which will beat inflation and return from other asset classes.
What are some of the DOs/DONTs for smart investment?
I am tempted to put this section based on the recent conversations in active social media groups which I am part of:
- Always focus only on ensuring that you have the right Mutual Funds/Stocks in your portfolio
- Do not get unnecessary perturbed by the short term macro and micro challenges. They will get addressed over time. Any decision to get out and get back in equity will back fire as you will not be able to find the optimal top and optimal bottom of the market.
- When an issue is flagged out in a company, do not be in hurry to buy that stock even if the company has been credible in past. You do not know, what other issues can come out of the closet of the company. Few recent examples: Yes Bank, Reliance ADAG group companies.
- Averaging a tainted stock is not a good idea. You may be pushing yourself in a swamp with concentrated portfolio, when you could have invested in umpteen number of alternate clean investment opportunities.
- Do no try to catch the falling knife as you will never know the bottom e.g. Investment in IL&FS post payment default last year
- Do not buy small cap stock on your own or on others advice because as an individual we have limited capability to research and stay on the top of these investments. You will be better off buying a Mutual Fund in the respective category rather than finding a multi-bagger on your own.
- Do not invest in penny stocks. Insider trading and illiquid nature of the investment can put you in a hole.
I suggest that individual investors invest in Equity only through Mutual Funds and not through direct stock purchase.
“Patient Investing Is A Virtue”
The writer is a SEBI Registered Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services. If you want to know more about him, click on https://finmyn.com/about/.