The financial year 2018-19 should be interesting for the Indian economy and markets with economic growth piggybacking on political stability. GDP growth is expected to pick up as interest rates are down and consumption demand forecast to be strong on the back of two good monsoons. Rising global growth rates should see a spurt in exports.
But it is also the year when the benefits of tax reforms such as the Goods and Services Tax and demonetisation, as well as banks’ recapitalisation, will begin to be felt. The tax base is expected to widen with the inclusion of more direct taxpayers as demonetisation data is analysed, resulting in higher revenue collection.
Lower taxes on the horizon
These factors supported by stronger economic growth offer the government a unique opportunity to lower the tax burden. It is widely expected that corporate tax rates may be brought down in the imminent budget for 2018-19, the Modi government’s last full budget before next year’s general elections.
A recent Morgan Stanley report on Asian markets says that over the next ten years, domestic equity inflows could range from $420 billion (Dh1.5 trillion) to $525 billion. But rising oil prices and assembly elections in 2018 could keep the market volatile. It also predicts a real GDP of 7.5 per cent in FY 2019 and 7.7 per cent in FY 2020, from 6.7 per cent in FY 2018. Separately, Goldman Sachs predicts the benchmark Nifty index will climb to 11,600 by 2018 end, a 12 per cent rise. Nifty rallied 28 per cent last year. It also estimates earnings growth of 18 per cent and 17 per cent in the calendar years 2018 and 2019 respectively.
The definitive victories in several state elections including Uttar Pradesh and Himachal Pradesh are a morale booster for the Modi government but less-than-expected numbers in Gujarat could see the government focusing on the rural sector and putting big-bang reforms on the back burner. Populist measures such as tax cuts, and increased funds for skilling and job creation for rural youth and schemes such as 24x7 power may get higher budget allocation.
Among emerging markets, India continues to offer one of the highest returns on investment (ROI), 10-12 per cent on equity and 5-6 per cent on debt.
Better than the US
Amit Kukreja, a Gurgaon-based wealth advisor and founder of Amitkukreja.com, points out that India offers better returns than the US. “For the past ten plus years, India has offered ROIs of 15 per cent compounding,” he says. “Indian markets have offered 5-10 per cent more than the US on equity while on debt on inflation-adjusted basis it has offered at least 50-100 bps more than the US market. From an HNWI perspective this is as good as it gets.”
Gaurav Mashruwala, a Mumbai-based financial planner and wealth advisor, advises NRIs to make clear investment plans for any money they’re putting into their home country. “While markets have performed phenomenally, one must bear in mind the reason one is investing in the home country and create a good mix of long-term, short-term and medium-term investments.” He recommends debt instruments for short term (up to 3 years), equity for long-term (7-9 years) and a mixed portfolio for an investment horizon in between. Both Mashruwala and Kukreja suggest a 50-50 split between investments in the home country and the country of residence.
Mashruwala says fixed-income options such as NRE and NRO deposits are worth exploring, especially after the closure of the post office investment options for NRIs. He advises NRIs to pull their money out of these accounts and reinvest in NRE/NRO instruments as such accounts will now only accrete 4 per cent interest.
Another instrument he recommends are gold bonds and gold ETFs that can give an interest of 2.5 per cent without a lock-in period. Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trust (REITs) are also worth looking at. “The few INvITS and REITS launched in India have given good returns but more need to be launched with proper education,” he says. “They would offer high yields to investors in a market where yields are diminishing.”
Do it yourself
Anil Rego, another Mumbai-based wealth advisor and founder of Right Horizons, says that mutual funds (MFs) are among the best investment options for NRIs given the ease of operation. “You can buy and sell online as opposed to direct equities that require RBI permission. So to avoid a lot of paperwork, NRI clients would be well advised to consider equity MFs for long-term and fixed-income instruments for short-term needs.” He also points out that these are tax-efficient, with equity not attracting long-term capital gains after one year and debt after 3 years. “But investors must remember that different asset classes perform at different periods, so it’s better to be clear about investment goals before putting money in a scheme.”
Rego also cautions that people should consider investing in NRE/NRO instruments with large banks such as ICICI, HDFC and SBI if they are not clear about the upcoming FRDI legislation or bail-in scheme for PSU banks. The legislation has led to lot of rumours of banks shutting down with the depositors’ money unpaid.
Where to put your money in 2018
Global brokerage houses remain bullish on the Indian equity markets with most predicting returns close to current levels. While Goldman Sachs has predicted that the benchmark Nifty50 will touch 11,600 by December 2018, with earnings growth pegged at 18 per cent and 17 per cent for calendar year 2018 and calendar year 2019, respectively. Credit Suisse is overweight energy metals, PSU banks and IT for 2018. Nomura, which expects the Nifty to touch 11,880, has named HDFC Bank, SBI, Shriram Transport Finance, Maruti Suzuki, Ashok Leyland, RIL, GAIL and L&T among its top picks for the year. Bank of America has sounded a note of caution saying that the earnings by themselves may come under pressure this year. The report cautions that the current levels of returns are possible only if the price-to-earning ratios sustain.
Gold closed 2017 at $1,300 (Dh4,774) per ounce, its best since 2012. In 2018, the momentum is expected to continue. In the first week of 2018, both gold and silver showed a continuing trend of building on past gains with some analysts predicting the yellow metal touching $1,400 per ounce sometime in 2018. Wealth advisors continue to prefer investing in paper gold over physical gold in 2018. For those who prefer to invest in physical gold it would be worth remembering that the Indian government’s gold bond scheme offers retail investors a discounted price on the precious metal.