Interesting Times- Demonetization & Trump Trumps.
Interesting Times- Demonetization & Trump Trumps.
Head- Client Advisory at SNMA Enterprise Pvt. Ltd.
Today we stand at one of the most perplexing moments of Indian financial History. A phase where we know for sure inflation will lower, business is frozen, shops are being opened just as ritual & not for regular business as there are no buyers, bank accounts are flush with funds & bond yields have dropped knowing further easy supply of money.
Queues at Banks/ ATMs are endless, chaos is all over. Hope to get cash exchanged rises every morning and crushed in evening. Bankers have become the most sought after people in the country. Good relationship with a banker is no less than knowing Modi, himself.
Is there a Real Gain wrapped under this pain? –
Situation is near term Negative for Consumer Durable, Luxury Items, Gems & Jewelry, Real Estate & allied industry. However, this move will lead to improved tax compliance, presumably lower corruption & a stepping stone for sustained long term economic growth. India’s Shadow economy stood at 23% of GDP- World Banks Estimate in 2010.
Our Observations: –
1. Demonetization will not wipe out entire black world, but will bring it down to 70%-75%. But most IMPORTANTLY it’s a lethal blow to Pak manufactured counterfeit currency which will be ex-terminated.
2. Total 500/1000 Currency Notes in circulation is approx. 14.2 Lac Crore, and in a positive sign roughly 4Lac Crore, has been deposited in banks in past week. Conservatively speaking if govt. manages 10% tax on this, it results to whopping 40 Thousand Crore of Exchequer Income. And this is as on, 16th Nov 2016. This will get better as we near 30th Dec deadline.
3. Short-term disruption and wealth erosion due to demonetization will impact the high-end consumer segment. The luxury goods market is likely to get affected as this move represents an erosion of wealth of wealthy’s. This will be felt more in luxury cars, SUVs, gems and jewelry and high-end branded products
4. Consumer non-durable sector is also likely to face some heat. The effect will vary for high- to- low-value items. While the impact on small-ticket discretionary spending will likely be minimal in short term, high-value items can experience long-term impact.
5. Negative impact on the GDP in the Oct– Dec 16 quarter and spill over to Jan-March Q. Sector’s heavily dependent on black money will witness stress.
6. Real Estate Sector, let’s do a micro analysis- The Organized & the Unorganized- Primary Sales & Secondary Sale (Re-sale)- Commercial & Residential: –
A. Broadly all will see a dent.
B. Organized Grade A developers in Primary Market should be able to come out the woods sooner, their dependency on cash has always been lower and people vouch for quality. Correspondingly unorganized real estate will witness the maximum burn, large land deals especially.
C. Secondary Sales or Re-sale -Cash is custom and accepting it is a ritual, will witness maximum collateral damage. Primary Market– impact will be less intense coz inflation will result in lower interest rate & this can help in sales.
D. As life comes back to normal in few weeks/ months, businesses should run. Commercial & Retail Real estate will move on, residential should witness pain little longer.
E. Well as of now, all builders are doing brisk business, coz in the run up 30th Dec, Real estate is the place where you can easily park cash, Be it any denomination- Old or new.
7. Banking Sector: – Windfall deposits in Banks will boost their CASA (Current Account/ Savings Account) deposits, which is their actual bread and butter. So it’s party party time for them, though occupied till hilt in exchanging notes and managing crowd. Near Term credit off take will take a hit as bankers are busy, Demonetization can also potentially fan the NPA fire coz most SME/ Businesses will feel the cash crunch and NOV-DEC 2016 will be a wash off for them in terms of sales.
Trump Trumps: – Donald Trump, trumped most of the opinion polls to become 45th US President. Global Markets has been volatile since then, Mexican PESO plunged to record low and it feared Trump will drive out large Mexican population living in US, mostly illegally.
Fear Factor: -Trump’s anti- outsourcing rhetoric has sent shivers down the spine of countries exporting to US. As Per NASSCOM, Indian IT sector aggregated revenues of US$147 billion in 2015, where export revenue stood at US$99 billion and domestic at US$48 billion. IT Industry is terrified with the change of leadership in US.
On the contrary we feel that he(trump) would first try and bridge the Trade deficit with China (its Trade deficit (imports being higher than exports) stood at USD 335 Billion in 2015). So trump should settle score here first and India stands to gain on few sector if this happens, especially considering his cordial relationship with India. US enjoys Trade Surplus with India.
Markets are likely to remain choppy for some time, given the uncertainty surrounding potential US policies under Trump’s presidency & demonetization further smothering businesses in India.
Rationally thinking much of the rhetoric we heard on the campaign trail (US Elections) may not result in any concrete action & demonetization will have short term impact but long term will cleanse our system. As usual there is too much pessimism and fear, which may not be warranted.
Going forward markets will soften for a while and every dip is a buying opportunity. Our fundamentals remain strong and global investor can’t afford to overlook us. What we should always remember is markets always takes you through a roller coaster ride, hence there are Good Times and interesting times (where we are in currently) which always becomes a learning experience. And, if you have invested RIGHT then just sit TIGHT, and have fun. There is absolutely nothing to worry about and we shall be back on track soon.
Cheers !! Yogendra Shah