Watch out for these likely tsunamis

Investors can watch out for some likely tsunamis, both globally and domestically.

Global factors: An increase in interest rates by the US Fed on December 13/14 is becoming more likely. The US economy grew slightly. A hike in US interest rates would lead to a continuation of selling by FIIs.

But a hike could become more difficult after the Trump Presidency starts in January. His Treasury and Commerce secretaries are both Wall Street veterans, who would be loath to rock the boat.

The other factor that will hurt India is the spike in crude oil price, which jumped to $52/barrel, after an unexpected agreement by OPEC (supported by Russia) to curb production, was reached. This will raise India’s trade deficit, as it imports 80 per cent of its crude oil requirements. The rupee has weakened.

A third factor is the referendum, this Sunday, in Italy, which could, if it fails, see the fall of the Renzi Government, and the failure of five banks, leading to a Euro banking crisis, which would adversely impact India too.

Domestic factors: PM Modi has warned of further follow-up steps after demonetisation. There are two steps which seem logical and can be expected. Both are related to special exemptions.

One is a clamping down on the misuse of Participatory Notes. Part of the black money generated over seven decades of corrupt rule has gone abroad. Most offshore banks are under pressure to reveal details, when a government asks for them. So, a preferred route for Indians is through P-Notes. Indian investors hold shares in Indian companies through P-Notes, using a sub-account with a registered FII.

Holders of investments through P-Notes are exempt from capital gains tax, and can also repatriate the profits — a highly iniquitous way of rewarding those who evaded taxes and illegally repatriated money from India.

If P-Notes are clamped down upon, as they should be, then the stock market would go down. This would present an excellent buying opportunity.

After demonetisation one can expect interest rates to fall. If deposit rates fall, some estimates say that up to $100 billion can flow into equities.

Similarly, other tax exemptions must be looked into, and tweaked. This column has been suggesting that agricultural income should be taxed, after a generous tax-free allowance to protect genuine small farmers. There is rampant misuse of tax-free agricultural income to launder black money and this must stop.

A 2013 report by Financial Action Task Force (FATF) has several pages devoted to how counterfeit currency has been used to fund terrorist activities and to undermine the country’s economy. No action was taken till now. The same people who ignored the warnings are now raising their voice when action is being taken. They ought to maintain the same silence they displayed when in government.

So, investors may like to wait to see if any of these factors cause a sharp drop in the stock markets, which would be a good time to buy.

(The writer is India Head, EuroMoney Conferences. The views are personal.)

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