How Demonetisation Has Impacted The Indian Equity Market

Mr. Donald Trump and Demonetisation are proving to be a double whammy for the Indian markets these days. 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.
 Dalal Street 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 at 8,952 feet above ground, Nifty realised that it was running short of fuel for the next upmove. What’s more, investors were left with an empty bag in place of a parachute. The result was evident — crash!

Data as on November 17, 2016
 (Source: NSE,PersonalFN Research)

Emerging equity markets have been under pressure ever since Mr Trump has won the elections. US$ has been appreciating against emerging market currencies, and Foreign Institutional Investors (FIIs) have been taking out money from weaker markets. India has been one of them. The timing of Demonetisation couldn’t have been worse than this. Indian markets seem to have entered a protracted lull phase. 
 Let’s understand where we are heading from here onwards…

  • As the cash is scarce at the moment, consumers are likely to postpone their buying decisions, and may pick up only things that are absolutely essential.
  • 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.
  • In the pre-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.
  • As a result of above factors, companies depending on consumers’ discretionary income have been hit hard. Along with them, those in real estate, and Non-Banking Financial Institutions (NBFCs) have performed terribly.
  • 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. As two-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 across the board. Before demonetisation caught us unaware, markets appeared overvalued on their trail earnings. Post demonetisation, valuations have become even worse, if we factor in future growth prospects. So the current fall has fundamental reasons, and it’s not just a sentimental impact of a disruptive action. 
 Another technical factor that may limit the upside of this market is the lack of leadership. Auto companies have tough days ahead, and banks are dealing with their own problems. NBFC space has been witnessing some panic selling, and consumer-focused companies are charmless too. Growth has been a big question mark for IT companies, although valuations in this space are reasonable and even attractive in some cases. This leaves only a handful sectors that may take a leadership position to lead the markets from the front. 
 The only ray of hope for the bounce back is — the flow of foreign capital resumes and investors take a slightly longer view on the markets ignoring the extraordinary circumstances that prevail now as one-offs. 
 Pullbacks are possible, but by and large markets are likely to remain lacklustre. 
 PersonalFN is of the view that, you shouldn’t sell your equity holdings nor redeem your equity oriented mutual funds in panic. On the contrary, you might get some fantastic buying opportunities in the current market conditions. Smart investors aren’t afraid of market volatility. This is not to say that, you should speculate on the direction of the markets and place your bets depending on their prospects. 
 Follow these 3 simple steps under current market conditions

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