On 8th November, 2016 at 8 o’clock a bold announcement was made by our Prime Minister, Shri Narendra Modi. He demonetized the Rs. 500 and Rs. 1000 denominated notes with immediate effect. Suddenly overnight, all experts were forced to get back to our macroeconomics books to just understand what Modi was trying to actually do. It has become the talk of the town and people in every nook and corner were discussing on ways to salvage their life time savings with least possible tax pinch.
What does this mean for the People?
There is huge and deep dig into the savings culture where women of all ages (particularly House Wives) have a habit of saving something from their routine expenses – and are now questioned or subject to tax. It is not a very happy feeling for them. However, the larger purpose of this is that the menace of black and unaccounted money will be crushed. People will think twice before trying to take a cut in a large deal through cash back. Having said that, it is 60 years of habit of making money through asking cuts, bribery and asking money for getting work done at a Govt Undertaking was a norm. This habit will not change easily because it had become the way of life for many. Many bank managers started finding loop holes in the system and exploited ways to convert old currency to the new for a “cut”. This is only because of the years long habit set in the peoples mind to find ‘Jugaad’ for everything. Modinomics says that all this is wrong, illegal and should not be done. With transactions going digital we will see more savings, more rush to financial assets and better financial literacy in the long run of the public.
The Outlook for the market
The market had run away beyond expectation and we were quite scared about the euphoria that had got created in stocks (more than 300 stocks doubled in less than 3 months due to liquidity in illiquid mid caps) and somewhere this situation is a welcome to our stand and position. This gives us an entry into good stocks at lower levels. However we will have to wait and watch the impact in the immediate term. Based on our few interactions with our rural and semi-urban cities the situation seems to be normalizing and there is an overall support for the PM echoing around the country for this step.
As the dust has settles we are seeing that demonetization has given a massive boost to digital transactions and payment wallets usage has shot up multiple times. This will give a boost to true digitization. Till now money spent in cash was mostly unaccounted and had no trails, but with digital transactions even the smallest of the expenses will get tracked which gives an opportunity for many Fintech companies to build apps, websites relating to digital transactions.
The long term effects of demonetization on our country will be far reaching and is likely to impact the below:
1. Financial Assets, Financial Services and Banking : We feel the biggest and best decade for financial assets and services in the history of India should unfold, deposits will see a meteoric rise, hard assets like GOLD and Real Estate will go out of favor for a long period. Equity will be a major gainer particularly through mutual funds, Portfolio Management and Hedge Funds. Banks which will adapt to new ways of banking, new systems and new methods of transactions will ultimately see a rise. Initially we will see a massive boost for account opening which will bring about the financial inclusion for the entire country.
2. Hard Asset companies will see a good amount of slow down particularly where there is direct cash usage such as Auto/Jewellery/Real Estate. In Real estate a large part of the deals which are in the luxury segment will see significant slowdown as many deals in this segment were done with part cash and part cheque to save on Stamp Duty, taxes etc and also because cash income was abundant. The ticket of 3+ crores is the one where we will see significant slowdown, however in the smaller ticket housing we may see a quick recovery.
3. Housing Finance companies which have been growing at a blistering pace may see a small setback however the real users will ultimately use only this route and this will pick up quickly. The companies which have done lending to large Real Estate players will be the ones getting affect. As the rates will fall, housing loans will get cheaper, more and more people will start taking loans and price of low cost housing will go up. This cycle will take some time to kick off but that would be the obvious step going forward.
4. Rural Consumption will likely take a huge beating for tractors, tillers and white goods..however they will also see a sharp recovery once the storm of cash crunch settles. Further a quick check on the Ministry of Agriculture website for rabi crop plantation for November 2016 suggests that demonetization has had no impact on the winter plantations. The total acreage has seen a minute drop of 0.27% for 2nd week of November on a corresponded week basis. For FY 17 the rabi crop acreage has gone up by 8.54%. So this would be a good time for people to invest in stocks which have a focus on retail consumption such as tractor, agro chemicals and other rural consumables.
Given the above overall effect of demonetization is similar to that of car going at high speed and suddenly hitting a wall. There will be certain repairing needed and once that is done we can expect the car to again start moving at high speed. This repair may take 6month-12months or even 18 months. However, doesn’t mean the economy is going to come to a grinding halt. Only industries that dealt in large cash sums will see a slow down everything else like exports, infrastructure, defense spending is still on its way to higher revenues and higher profitability! Happy Investing!!