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Nov 12

world markets are in Jitter,what should you do.

Last week was black swan moment.

“A black swan,” said thinker Nassim Nicholas Taleb, “is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.”

 

First was the demonitisation of Rs 500 and 1000. On the next day, Donald Trump of the Republican Party garnered more electoral college votes to become the next US president in a hotly contested and bitter election against democrat Hillary Clinton, who won more popular votes.

The Republicans also seized control of both the House of Representatives and the Senate, ensuring smooth sailing for Trump to push through his controversial agenda on immigration, protectionism and health care.

Both these events are being commented upon in social media as the latest 9/11 moments.

These two events will impact economy.

Let’s look at the Indian situation first.

Demonitisation has occurred before too, in 1947 and 1978. In 1978, the Indian government demonetized Rs.1000 notes—25 per cent of the money in circulation—that was never deposited in the bank.  If some people do not deposit their unaccounted money in banks—guesswork right now is about Rs 3-4 lakh crore—the government’s current account deficit will come down as economists will mark it negative in the accounts. Also, some people might be willing bring unaccounted money generated this year through different family accounts  to pay tax and surcharge this will flush the liquidity. Economists say this will augur well for the economy. Cash that was lying idle with people is finding its way into the banking system and that could lead to liquidity in the system as banks will lend more money to the public.

That, in turn, will help the Reserve Bank of India to cut interest rates. Lower rates will boost economic activity.

 

The windfall from demonitisation may even prompt the government to lower income tax rates or pump in money into infrastructure or it could do something to benefit farmers. This will again put money back into the system and the economy could grow faster.

So, what should you do?

Ignore the recent volatility and keep investing for next 15-20 days in both equity and debt investments. As simple as that.

This will give you a decent return. If interest rate heads lower, mutual fund income funds and long-term duration instruments are likely to give good returns over next one year. So, use volatility to your benefit and earn good returns.

I wrote last week about market volatility and how to benefit from it (link attached).

http://www.myassetsconsolidation.com/investment-advisory/every-country-is-investing-in-india-to-make-money-shouldnt-you

Now, let’s shift focus to the US. Trump will assume office only in Jan 2017 and the policy rollout will happen after that. Till such a time, the market will not have a clear direction and so will be volatile. Moreover, there’s a belief that despite the widespread criticism of Trump’s lack of experience in the government, he might still be able to deliver.

In uncertain times, patience pays.

Suresh Parthasarathy,

Registered Investment advisor

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