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Posts Tagged ‘global economy’

Over the weekend there was news that RBI Governor Raghuram Rajan’s term is ending on 4th September 2016. The market clearly does not like surprises, and therefore the impact could be short term volatility in currency,equity  and bond markets. Thus, whilst this is clearly a short term impact to India’s image in the international community and financial investors, we believe there is a list of very eligible candidates who can be appointed. In fact, the events over the weekend are likely to get the government to move much faster on finding an approprite replacement, and thus we believer there is no need of changes in your investment portfolio as a result of this. Ultimately, we believe that institutions are typically bigger than their chief executive.

The event which is likely to have a much bigger impact is the probability of Britain moving out of the European Union.  Over the last couple of weeks, there has been significantly higher newsflow around Brexit and the importance of 23rd and 24th June for world markets, due to the Brexit. Let’s understand the possible impacts of Brexit on your personal finances.

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What is Brexit?

The European Union has 28 countries as its members. European policies currently aim to ensure free movement of people, goods, services and capital amongst its member states. Out of these, 19 members use Euro as its currency. Britain which is one of its members is evaluting whether it needs to stay in the EU or exit. That’s why it is termed as Brexit – ‘ Britain Exit’.

Bexit and your investments

There is a possibility of largely two scenarios in the referendum on the Brexit, that is,  either a leave or a stay. Let’s examine the impact of each of these on your investments separately. As indicated, this will be decided on the basis of a referendum which is going to be held on 23 June – a final decision will be taken on the basis of the votes.

Scenario 1– Leave

  • Depreciating Pound and Euro / Strengthening Dollar and Yen– Thus, if you have kids studying in the UK or planning to study there, you couldend up paying lesser.
  • Strengthening Dollar

The US dollar could then be expected to strengthen in the short term as investors will rush to Dollar as a safe investment vehicle. If you have any dollar denominated investments then those will increase in value.

  • Sell off in the emerging markets

In the short term emerging markets including India , as well as UK and European markets, could experience volatility due to flight of capital to safety . However, the expectation is that impact on India will be lesser compared to the other emerging markets due to its realtively stronger fundamentals. Thus, if you have investments in emerging markets then those might see temporary fall in returns. Do not panic and sell. Over the longer term, the performance of your emerging market funds will depend on the economic scenarios of the individual countries to which your fund is exposed to, apart from the temporary brexit effect.

  • Gold could become attractive

Gold is gaining importance as an  investment vehicle with rising global uncertainties. Therefore, Gold Exchange Traded funds, Gold funds and sovereign gold bonds could benefit from this price rise of gold, as well as strength of the US dollar.

Scenario 2- Stay

  • Equity markets could react positively

This will ideally mean increase in the value of your equity investments since world markets could do well, as the overhang of the Brexit has led to signficant market volatility over the last few weeks. A relief rally could follow, especially as multiple other EU countries are also at this point looking to see what the UK does with the Brexit.

  • Bond markets could be stable

If the brexit does not take place there may not be any selloff in the bond markets which means the yields could remain as is. The higher inflation ovehang on domestic bonds is likely to be the driver of bond prices going forward in that case.

  • Euro/Pound sterling could strengthen

There will be increased confidence in European markets and Euro could appreciate. Your Euro denominated investments could do well in this case.

All in all,

Since the outcome is hard to call currently, one may need to track this event carefully, and decide you investment strategy carefully basis the outcome of the referendum. In the short term volatility may be expected to be higher than normal, but do not take panic calls and stick to your asset allocationand overall financial goals and plans.

 

 

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Over the last couple of weeks, there has been singifcantly higher news around Brexit and the importance of 23rd and 24th June for world markets, due to the Brexit. Let’s understand the possible impacts of Brexit on your personal finances.

 Doc3

What is Brexit?

The European Union has 28 countries as its members. European policies currently aim to ensure free movement of people, goods, services and capital amongst its member states. Out of these, 19 members use Euro as its currency. Britain which is one of its members is evaluting whether it needs to stay in the EU or exit. That’s why it is termed as Brexit – ‘ Britain Exit’.

Bexit and your investments

There is a possibility of largely two scenarios in the referendum on the Brexit, that is,  either a leave or a stay. Let’s examine the impact of each of these on your investments separately. As indicated, this will be decided on the basis of a referendum which is going to be held on 23 June – a final decision will be taken on the basis of the votes.

Scenario 1– Leave

  • Depreciating Pound and Euro / Strengthening Dollar and Yen– Thus, if you have kids studying in the UK or planning to study there, you couldend up paying lesser.
  • Strengthening Dollar

The US dollar could then be expected to strengthen in the short term as investors will rush to Dollar as a safe investment vehicle. If you have any dollar denominated investments then those will increase in value.

  • Sell off in the emerging markets

In the short term emerging markets including India , as well as UK and European markets, could experience volatility due to flight of capital to safety . However, the expectation is that impact on India will be lesser compared to the other emerging markets due to its realtively stronger fundamentals. Thus, if you have investments in emerging markets then those might see temporary fall in returns. Do not panic and sell. Over the longer term, the performance of your emerging market funds will depend on the economic scenarios of the individual countries to which your fund is exposed to, apart from the temporary brexit effect.

  • Gold could become attractive

Gold is gaining importance as an  investment vehicle with rising global uncertainties. Therefore, Gold Exchange Traded funds, Gold funds and sovereign gold bonds could benefit from this price rise of gold, as well as strength of the US dollar.

Scenario 2- Stay

  • Equity markets could react positively

This will ideally mean increase in the value of your equity investments since world markets could do well, as the overhang of the Brexit has led to signficant market volatility over the last few weeks. A relief rally could follow, especially as multiple other EU countries are also at this point looking to see what the UK does with the Brexit.

  • Bond markets could be stable

If the brexit does not take place there may not be any selloff in the bond markets which means the yields could remain as is. The higher inflation ovehang on domestic bonds is likely to be the driver of bond prices going forward in that case.

  • Euro/Pound sterling could strengthen

There will be increased confidence in European markets and Euro could appreciate. Your Euro denominated investments could do well in this case.

All in all,

Since the outcome is hard to call currently, one may need to track this event carefully, and decide you investment strategy carefully basis the outcome of the referendum. In the short term volatility may be expected to be higher than normal, but do not take panic calls and stick to your asset allocation and overall financial goals and plans.

 

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The Fed rate hiked interest rates by 0.25%, which was in line with expectations. Going forward they plan a gradual increase in rates. Long term policy rates are expected to be at 3.5% by 2018 with a 1% increase expected in 2016 and 2017 each. It will largely depend on how the world economy shapes up, the global oil prices and the US dollar market.

Is a Fed rate hike good for Indian equities?

The markets worried about a Fed rate hike. With the event behind us, we can go back to history. The table below shows a Fed rate hike in the past and its impact on Indian equity markets 1 week, 1 month, 6 months and 1 year after the first rate hike. Historically there has not been much movement in Indian Markets in the short term. There has been significant positive impact in the 1 year after first rate hike period.

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History needs to be looked at with the rest of the data, and not by itself.

How the world currently looks?

The growth in the US has been steady. There has been a pickup in consumer spending which is a positive indicator of growth. There has certainly been a decrease in unemployment rate. The economic scenario in Europe is gradually improving, while China is still under pressure from  aslowdown in manufacturing sector, while the service sector and consumption are both stable. Inflation is well below the 2% mark in the US. The US  Dollar has been strengthening and is expected to strengthen going forward also.

Emerging Market valuations suggest that a significant portion of this movement were already factored in. The divergence in monetary policy with the US increasing interest rates, and Europe and Japan trying to increase money supply could mean that there will be volatility depending on how policy rates change.

The way ahead

The inflation numbers which were very low earlier are moving upwards, thus reducing deflation risks. Global inflation is expected to pick up in the second half of 2016 Oil continues to be under pressure due to oversupply. Going forward oil prices could rebound in the latter part of 2016. Commodity exporters are unlikely to get much relief from low prices in the near term, while commodity consumers enjoy the windfall of cheap raw materials.

The developed markets, especially the US have outperformed the emerging markets in the last 3 years. This may continue in the first half of 2016.

A strengthening US dollar could cause a drag in corporate earnings. The USD likely to be stronger in the first part of the year, and then stabilize as the year passes.

Impact on Equity Markets – Global, Emerging Markets and India

In spite ofpositive sentiments in US and reducing unemployment rates, the Fed may still be slow in increasing rates because wage inflation is still low.

Indian market performance will depend on Corporate Earnings growth and debt reduction. Companies having debt in their books in dollar terms will have to pay more. Asian currencies are stable. Emerging Markets shouldselectively start seeing greater flows from FIIs in the second half of 2016

Developed markets will be preferred over emerging markets in the first half of 2016.

Impact on Bond Markets

The10 years Bond yield in US is currently at 2.3% and may rise to approx. 2.75% by the end of 2016. This may draw foreign investors away from some Ems. However, with Indian yields at close to 7%, there could be a selloff in the Indian Bond markets, pushing yields up.

Impact on Indian Rupee

With the Fed announcing a gradual increase based on future news flow, currencies like the Indian Rupee where the current account deficit and foreign exchange reserves are high,could be fairly stable and the performance is likely to be driven by inflation differentials over the long term.

Impact on Gold

Gold is normally used as a hedge against inflation. With low global inflation and also falling commodity prices and USD strength, gold could continue to remain weak.

All in all, keep your asset allocation intact, and rebalance upwards with more equity exposure as corporate earnings start to improve over the next few quarters.

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Over the last fortnight, news about a possible double dip recession in the US has renewed fears in all our minds about the world economy slipping into recession. More countries keeping getting added to the list of potential problems with significantly larger economies like Spain and Italy in the radar. This clearly indicates that the global economy is being faced with challenges of slow growth.

A significant component of world growth expectations were driven by a recovery from the US. With the S&P downgrading the US rating over the last few days, this fear of a slowdown has got exaggerated and stock markets across the globe have been seeing significant movements, both up and down. Headlines like Manic Monday, Terrible Tuesdays, Wonder Wednesday only add to the noise and panic and we believe investors need to be careful about ensuring that they do not lose focus with respect to planning their personal finances.

So the moot question is “what should I do in this noisy environment?”

  1. Accept that this uncertainty is the new normal – With the US and Europe having spent beyond their means for many years now, don’t be surprised by downgrades that continue to take place as we go forward. Whilst the crisis in 2008 was unprecedented, we need to be ready for crises of this kind on a reasonably frequent basis as countries across the globe face challenges at different points.
  2. Fixed income is not the solution – There is a tendency to restrict all investments to fixed income in an uncertain environment. Whilst we believe that an uncertain environment is now the new normal, you will still need to have enough wealth to provide for all your financial goals, be it retirement or education for your children. This may or may not be possible with a 100% fixed income portfolio and depends on your current wealth and savings potential. It is critical that you look at these goals after adjusting for inflation, as we can expect the entire world to see much higher inflation over the next few years. You may need to look at this  After this exercise, you may therefore be forced to look at inflation beating growth assets like real estate and equities in the current environment.
  3. Stick to your asset allocation strategy – During times of extreme volatility, there is a tendency to want to change your mix of assets dramatically to align with the short term view of the asset. For example, investors have been rushing to buy gold over the last couple of weeks due to heightened uncertainty. Whilst a small tactical change can be considered, moving entire monies from one asset like equities to gold is not a recommended strategy as when the tide turns you may find that you have missed out on investment opportunities.
  4. Remember why you are investing – Investments should be made with a clear end goal in mind. Maximising returns with minimum risk is can never a financial goal. You need to look at the end of use of the money clearly whilst investing itself. Investments for goals which are 5-7 years to realisation can use equity and real estate offerings in them whilst shorter term goals should be fixed income driven.
  5. Invest looking forwards, not backwards – There is a tendency to look at the past returns to decide whether or not to invest in the future. Good returns in the recent past tend to make investors want to invest more into that asset class whilst investments with lower returns in the recent past are shunned. The best returns in most investments come when the view on the investment is not positive. Investors who bought gold at the turn of the century have had close to 18% returns per annum even though they made no money in gold for 20 years before that.

This article was written by Vishal Dhawan, CFPCM and appeared in the EXIM INDIA newsletter on 16th August 2011 .


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