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Investment in 2016 – 5 Factors that will decide the Returns


Investment in 2016 is the most trending query in personal finance space. It is a million dollar question. There is no better way to start the year with factors that will influence returns in 2016. The year 2015 was a roller coaster ride for investors. It began on a good note but ended on a bitter note. Overall, investors lost the money except traditional investors who invested in fixed income or small savings scheme. In my post, Equity Investor – 5 Biggest Mistakes I should have avoided i discussed my mistakes. As i mentioned that going forward, i will change my investment strategy. I will focus more on factors that can influence the returns. It is more broad-based investment strategy that cannot go wrong entirely.

To substantiate my claim, one of the example, from last year was Gross NPA’s of Banks. The analysts were gung-ho about the prospects of the banking sector, but Gross NPA’s of Banks keep bothering the sector. The analysts keep beating the bush that this sector is a major contributor to the economy. During the first half, the chatter was on the revival of PSU Banks by Govt. Unfortunately, it turned out to be operators ploy and retail investors stuck. The average drop in PSU Banking stocks is whooping 30% for CY 2015. In my post earlier last year, Should i invest in Banking Stocks? i shared the reasons why banking stocks are untouchable. I cautioned the readers through this blog in advance to avoid investment in banking stocks.

Investment in 2016 – 5 Factors that will decide the Returns

1. Crude Oil Prices and Inflation: The analyst community is split down the middle on the movement of crude oil prices. The currency, Gold Price, Inflation, etc. are linked to crude oil prices. Therefore, it is a single biggest factor that will decide the investment returns in 2016. Last year none of the analysts expected a sharp correction in crude oil prices.

Crude oil prices directly impact investment in stocks of oil marketing companies, aviation, etc. It directly influences the inflation and inflation to impact the large no of sectors. Therefore, the direct or indirect impact of crude oil prices will have a significant impact on the returns from investment in 2016.

My opinion is that crude oil prices will fall further and may touch 20$ per barrel. The three factors that will keep prices low are additional supply from Iran, less demand and backstage taken by OPEC  to retain market share. It may not remain low forever but will stabilize during the second half.

Currently, i am out of equity market, but my stand is that i will choose stocks that will gain from lower crude oil prices i..e. downstream oil marketing companies.

2. Fed Rate Hike and US Presidential Elections: In 2016, these two factors will keep the market on edge. These two factors will have a strong influence on the returns on investment in 2016. One factor that no one is counting in right now is a high possibility of the return of Republican party to power in the USA. The current USA president is from the Democratic party. The Democratic party is more favorable to India compared to Republican Party. I am anticipating any shift of power to Republican party will shake the investment scenario in India.

On the other hand, there will be more Fed Rate hikes as US economy is doing well. The people of US will believe this only if US Fed hike rates. Any US Fed rate hike will push Indian equity market 3-6 months back. Even if there is one more Fed rate hike in 2016, it will wipe out possible investment returns from Indian Stock Market.

My opinion is that this factor will impact IT companies and will also affect FII fund flow. As i keep highlighting that FII buying is like oxygen for Indian Markets. Besides equity, outflow from debt markets will impact returns from debt funds. As i shared in detail in my post, Debt Funds – 7 Hidden Risks.

3. Curb on Black Money and Real Estate Bill: From 1st Jan 2016 it is mandatory to quote PAN for all the transactions above Rs 2 lac. It is a right step to curb the flow of domestic black money. I welcome this step from Govt. Going forward, i am expecting this limit to be further lowered in a gradual manner.

Secondly, the real estate regulatory bill will be passed in 2016. Now you must be wondering what is the correlation between mandatory quoting of PAN and Real Estate Regulatory Bill on my returns on investment in 2016. Let’s check

The physical assets Gold and Real Estate are two heavens for parking black money in India. Any curb on black money will choke up the supply of funds or investment in these two physical assets. In short, it will reduce the demand. Therefore, i am anticipating an adverse impact on these two physical assets. The Real Estate Regulatory Bill will make it tough for builders to launch new projects that may put small builders out of business. Therefore, impact on real estate might not be severe but gold investment will take a big hit.

My opinion is that returns from gold or real estate will not tumble but remain subdued or stable. Gold is also impacted by currency movement. Like 2015, investment in physical assets will remain stagnant.

4. Weak Corporate Earnings and Job Market: Of late you must have seen news reports of large-scale layoffs and reduced corporate earnings. All these factors are interlinked to each other. Fewer job opportunities indirectly mean low demand in the economy. Less demand, in turn, means weak corporate earnings. Poor corporate earnings mean more layoffs. It’s a cyclic process. Besides little demand, the debt is another big concern for corporate India.

Now you must be again wondering how it will impact my investment. It will directly impact your equity investment. At the same time, to boost growth RBI may go aggressive on rate cuts. Again it will depend on inflation that in turn majorly depend on crude oil prices. It’s a mystery, and i don’t know how it will shape up.

My opinion is that inflation will start increasing due to lower base effect. It will limit the scope of any future rate cut. Therefore, growth will take backstage, and weak corporate earning will last for 3-4 more quarters. The short-term debt funds may deliver double-digit return if there is no more rate hike. I am also considering adding tax free bonds to my portfolio for long term investment.

5. State Elections, Sentiments, and Reforms: It is quite unfortunate that reforms are taken hostage by small regional parties. In 2016, Four key states like TN, WB, Assam and Kerala will go to the poll. Any mandate in state elections is considered as a mandate for or against the central govt. It is a desperate attempt by a section of regional parties to keep their vote bank intact. Like 2015, the state elections, sentiments, and brake on reforms will shiver the markets. The reforms also directly impact the corporate earnings. As i mentioned, that factors that influence your investment are also indirectly linked to each other. I hope better sense will prevail among opposition parties, and they will allow the govt to do business in 2016.

I have some more factors to share that will impact your investment in 2016, but i feel that above mentioned are critical five. As an investor, i am not immune to international factors. Therefore, i included two key international factors to the list. I wish and pray that all investors make loads of money in 2016. Happy investing !!!

Copyright © Nitin Bhatia. All Rights Reserved.

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