The month gone by was characterized by two major events viz. election of Donald Trump as the 45th US President and demonetization of high value currency notes in India. While the US and the world markets were absorbing news of Trump's victory, Indian market was jolted by the demonetization announcement. However, after initial kneejerk reaction the markets recovered. Nevertheless, statistics show that in the month gone by, US markets recovered to post a gain of 6.9%, but Indian markets stumbled by about 3.2%.
Global. Since last month's election of Trump as president, stocks, bond yields and the dollar have all risen. The implications of Trump's win are sizeable corporate and personal income tax cuts and increased infrastructure spending, higher inflation due to fiscal loosening, trade restrictions and anti-immigration policies. All this may increase the pace of Fed rate hike and boost the dollar. A Fed rate hike this December will make the dollar the third highest yielding currency in the world, a strong positive for the dollar that may show an upside against major currencies for the coming 6 to 12 months. Global capital markets are likely to remain extremely volatile, especially currency and bond markets on speculation of policy changes in US post new president. However, the election of the new president in the US is likely to have a very limited impact on the Indian economy.
Domestic. On the domestic front, the impact of withdrawal of Specified Bank Notes (SBNs) was still playing out due to which RBI revised the gross value added growth downwardly from 7.6% to 7.1% for FY 17. Demonetization will have a negative short-term impact on businesses and sectors that are majorly dependent on cash transactions viz. construction and real estate, e-commerce especially cash on delivery, mobile phone manufacturers, utility vehicle sales especially two-wheelers and luxury cars, travel and hospitality sector, bullion and jewelry, mining etc. It is negative for equities in the short term and positive for bonds. Soon, the market will digest the event and move on. On the positive side, tax revenues will rise and this will help in reining in the fiscal deficit. The liquidity in the banks will force interest rate drop of fixed interest instruments. This will benefit the bond market and currency.
Investment Strategy. Therefore, it is a good time to invest in debt funds which are expected to pay 9 to 10% interest on falling yield rates. However, carefully choose the debt fund based on your investment time horizon and not the past performance of the fund alone. Invest in balanced or large cap and multi cap equity funds with a long-term perspective.