Donald & De-monetisation: The Double Impact

Last fortnight was something unprecedented, Demonetisation of Rs. 500/1000 notes in India and win of Mr. Donald Trump came as a double whammy for the Indian markets. The President-elect has bowled a bouncer that investors haven't managed to duck. On the other hand, ripple effects of Demonetisation have proved potent enough to create anxiety among investors. No wonder then, Indian stock markets. All of a sudden, have fallen off a cliff. Since their September highs, equity indices have lost approximately 10%. Individual names have seen even bigger cuts.

Stock Market was expecting Indian corporates to report encouraging numbers in Q2, FY 2016-17. And the exit polls on U.S. Presidential elections were hinting at a comfortable victory for Mrs. Hilary Clinton. Unfortunately, both these premises went wrong, and the result was evident—crash!

Let's understand where we are heading from here onwards.

  i.      Consumers are likely to postpone their buying decisions due to cash scarcity. People may pick up only things that are absolutely essential.

 ii.      Many small and medium scale enterprises that depend heavily on their cash sales to fuel their working capital requirements have been facing a severe cash crunch. Restrictions on withdrawals from the current account are making it difficult to run their business efficiently.

iii.     Even before demonetisation phase, many industries were operating at sub-optimum production levels. Ongoing slack in demand has further delayed a much-awaited recovery in the capex cycle. 

iv.       Due to the factors mentioned above, companies depending on consumers' discretionary income like Luxury items, White Goods electronics etc have been hit hard. Along with them, those in real estate, and Non-Banking Financial Institutions (NBFCs) have also faced the bad time.

v.       Moreover, companies linked to consumer-focused companies would also face problems. For example, the demand for real estate may be stiffled, impacting the prospects of paint companies and those manufacturing tiles and faucets etc. Similarly as two.four-wheeler auto companies are losing ground, auto ancillary companies will face some troubles too. It's no brainer to realise that, the job market is going to get affected badly if these sectors are to sail through hot waters. This may further drag down the discretionary spending. 

A culmination of these factors could be severe earnings downgrades for next couple of quarters across the board.

However there are positives for overall economy over al long term which are:

     1.     Big shot for Growth in Banking & Financial Services :

RBI estimates currently about 15 lakh crore of Rs 500/1000 notes are in circulation in the economy. Legal and large part of money should get back in the Banking System which will increase the Bank deposits significantly.

2.     Big Boost for Fiscal & Tax Collection:

A currency note is a promise by RBI to pay so, Money left which won't come back in the system will work as a destruction of Liability which lead to super normal profits and If transferred by RBI to  govt, will facilitate growth. There may also be a bump in Tax Collection.

3.     Monetary Easing Ahead:

This event will take systematic Liquidity to surplus from Deficit. This can lead to settle the rate Easing between Repo and Reverse Repo.

 

Pullbacks are possible, but by and large markets are likely to remain lacklustre for the time being. Snapshot view of demonetisation is given below:

However in this situation we shouldn't sell our equity holdings nor redeem our equity oriented mutual funds in panic. On the contrary, we might get some fantastic buying opportunities in the current market conditions. Smart investors aren't afraid of market volatility. However we should not speculate on the direction of the markets and place bets depending on their prospects.

Follow these 3 simple steps under current market conditions

·        Don't speculate or panic.

·        We can’t find bottom always so don't wait for the market bottom out. Prefer Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs) instead.

·   Consult your adviser and analyse your portfolio to ensure it is still in line with a personalised asset allocation that helps you achieve financial goals.