Where to invest in an economic slowdown?

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Where to invest in an economic slowdown?

Tuesday, 11 February 2020 | Santosh Joseph

It’s time to go out there, keep your asset allocation in mind and go ahead with your investments to make a handsome gain in the next four to five years

 Over the last couple of months, we have all constantly heard that the economy of the country is witnessing a slowdown. About two to three years ago, our GDP figures were anywhere between six to seven per cent whereas now suddenly we are below five per cent. All these statistics and numbers are suggestive that we might be heading towards an early recession or an economic downturn. To put this in context, we have to first understand the key factors that brought about ground-level bottom-up changes in the country’s economy.

The first grand move happened towards the end of 2016 when demonetisation was announced, followed by implementation of Real Estate (Regulation and Development) Act, 2016 (RERA) and the Goods and Services Tax (GST). These three major announcements and shift in policies have been the primary reasons for these unusual times in our economy.

In addition to these three reasons, multiple global scares like China-US trade wars, oil spikes, tensions with neighbouring countries, geopolitical risks and uncertainty of elections during the early part of 2019 can be looked as additional factors for weak demand.When we analyse these data points beyond just the numbers, it indicates that all this is leading to a tectonic shift in the way our economy was structured in the first place. Our economy has a large segment that is still unorganised, fragmented and localised. Many of our businesses were not under the tax ambit and sectors like real estate didn’t have a regulatory framework. When RERA and demonetisation were introduced, it curtailed the cash economy or what we call the parallel economy. When GST was introduced, many small and medium businesses which were not under the tax ambit could no longer get away with not paying taxes. All these changes have led to a level playing field for other players who were following the rules of the land and taxation policies removing any unfair advantage for those who were not paying them. This led to consolidation, formalisation and the industry became a lot more organised. There are some industries that benefitted from the GST whereas some of them had to make initial readjustment of a slightly higher input cost. Overall it will be right to say that this was a very positive move for a developing economy like India as it gives a level playing field for businesses across sizes to benefit from a unified policy. How does one invest in the backdrop of this formalisation, organisation, consolidation and slowdown? I believe that in a couple of quarters from now, this downturn could turn around. With the revival of the GDP and consumption growth back on track, the key driver that led to the deceleration in the GDP will be back to take it forward, gradually before we significantly uptick. The demand recovery will bring in the GDP growth along with inflation. This should take us back to a nominal GDP of 11 to 12 per cent. We have all the initial signs of green shoots that are emerging. The Government is aware of the challenges being faced by industries and several steps have been taken to address the issues. Similarly, active and dynamic policies by Central bankers, the Government and policymakers also indicate that the right steps are being taken towards clearing the challenges. All this presents attractive opportunities for a serious investor looking for the long-term. A downtrend is also a great reminder for people to not get carried away during the good times. We need to understand that ups and downs are a cyclical part of the economy.  If one had to take a three to five-year horizon and more, India is in a great spot domestically and globally. There is a lot of foreign interest that’s coming into the country and domestic demand is sure to come back. Many medium and small businesses that are nimble and agile have the ability to disrupt and offer great products because we have access to domestic and international markets. Technology is a key enabler for businesses to tap new markets and introduce new offerings. One can look at investing in equities or even quality debt funds to participate in this move.

We are all hoping that within a few years, India will be the next superpower economically.  The growth rate that it has is significantly better than many other emerging markets. If people should align their investments with the key sectors that will contribute to the growth of the economy, one can benefit significantly. Here are some options where people can invest:

Equities: Equities offer great growth for a disciplined investor. As opposed to popular misconception that putting money in equity is risky, done right this asset class can generate tremendous value in the long-term. There are multiple options available for people to invest in equities. Buying shares from the stock market, investing in Mutual Funds and exchange-traded funds (ETFs) are some. Investment can be done in lumpsum or in a staggered manner via systematic investment plan (SIPs). Equity investment has the potential to beat inflation and deliver superior risk and tax adjusted returns in the long term. Dividends, bonus, splits all add further value.

Fixed Income: Like equities, Fixed Income comes with a variety of options. These are popular and hugely-accepted.  Depending on the choice, one can opt from a combination of PPF, FD, Tax-free Bonds, Company Deposits and Government securities. Fixed income offerings of mutual funds have all the above options in very convenient schemes and it makes sense to take the mutual fund route for simplicity and efficiency. The hallmark of this asset class is stability and while some of these are backed by the Government too. So there’s plenty to choose from.

 Real estate: This may offer good opportunities in certain pockets because a growing economy means that there will be a lot more demand for housing and commercial real estate. With listing of Real Estate Investment Trusts (REITs) gaining popularity and more to come, many well-known real estate players are listed on the markets. One could invest in physical real estate, invest in share of these companies or even participate in their REITs

It’s time to go out there, keep your asset allocation in mind and go ahead with your investments to make a handsome gain in the next four to five years.

(The writer Founder and Managing Partner of a leading wealth management solutions company)

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