Yearend Note - Mr. Rajesh Iyer, Head - Investment Advisory Services & Family Office, Kotak Wealth Management

"Most of the commodities have done well in 2016 especially crude oil which is up ~45% this year till date on the back of some consensus for a production cut among oil producing nations. Industrial commodities like copper, aluminium, silver are up between 14% to 16%. Gold witnessed lot of volatility during the year on back of global events like BREXIT, US elections, anticipation of fed hikes and has delivered 7.7% in 2016. On the forex side, USD strengthened significantly against major currencies like GBP, Euro. And while INR depreciated ~2.35% against USD, it remains one of the better performing currencies in Emerging Market space.

We would start the year 2017 with many uncertainties as well as new opportunities to pick long term investment themes. The uncertainties on divergent monetary policies by global central banks, political uproar in Europe, new US Govt. regime call us to remain cautious in general. 2017 is crucial for European politics since Germany, France and Italy will go for polls. Risk appetite of global Investors has gone up as can be seen from the Brexit and Italy referendums. However, Political risk is one thing to keep in mind in 2017 as the three key countries go for voting.

There are two type of themes which seems to be taking shape - one, demonetisation can lead to an opportunity where organised sector consumption linked companies could structurally benefit and two, a potentially weak INR coupled with a potential expansionary US fiscal policy could actually make export plays interesting in 2017. Volatility is expected to continue and thus, we recommend sticking to one's strategic asset allocation. The core mutual fund allocation in equities should be in large cap coupled with bottom-up based managed strategies diversified across carefully selected equity managers; while in debt, the core should be built around a mix of high rated and credit accrual strategies.

India fixed income performance in 2017 may not be linear. We are in an environment where-in, the most developed economy in the world is on the path of increasing interest rates with a focus on pulling inflation. Whereas, domestically, we are focusing on taming inflation towards 4% over a period of time with a bias towards lower interest rates. As of now, we expect one rate cut of 25 bps in the first quarter of 2017. However, the road could by bumpy on the way. Half of the CPI weight is non-food and fuel related and is generally referred as "Core Inflation" which is sticky at around 5%. Further, inching crude prices and INR depreciation could impact the fuel component directly and other components indirectly. As a result, one need to be disciplined in portfolio construct with core being built around a mix of high rated and credit accrual strategies while the satellite portion to be played opportunistically with emergence of more data points."

Source : Equity Bulls

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