Savage crash in the stock market is not attributable to demonetization
Most novice investors have assumed that NAMO’s surgical strike on black money has crippled the Indian economy and that the crash in the stock market is the result of this.
However, this is not correct.
Samir Arora, the whiz-kid fund manager with Helios Capital, made the important revelation that the global markets have also tanked in a commensurate manner and that there is no co-relation between demonetization and the correction in the markets.
Do u think that Ind mkt down bec of demonetization?
Last one mnth:
Em Mkts: -6.47%
Asia Ex J: -5.45%
— Samir Arora (@Iamsamirarora) November 15, 2016
This opinion was corroborated by Manish Chokhani of Enam. He also produced important data to establish that all the global markets are in a corrective mode, with some having corrected a whopping 14% since Donald Trump’s election as President of the USA.
We are not alone on the way down. However I expect we will lead the way up 👍🏻 pic.twitter.com/zOXU3VwkHf
— ManishChokhani (@chokhani_manish) November 21, 2016
In fact, it is notable from the data produced by the two stalwarts that the Indian stock markets have actually outperformed their peers in the other emerging markets.
Demonetisation is a blessing or a curse for the economy?
The other aspect troubling novice investors is whether demonetization is a blessing or a curse for the Indian economy in the long run. It is difficult to come to any definitive conclusion given the conflict of opinion.
Bharat Dabholkar, the well-known ad guru, has formulated a simple formula to decide the issue.
He points out that while the supporters of demonetization are eminent personalities like Narayana Murthy, Deepak Parekh, Bill Gates etc, it’s opponents are junkyard politicians of dubious credibility like Arvind Kejriwal, Mayawati, Mamta Bannerji etc.
This itself implies that demonetization is good for the Country and the economy and should be welcomed with open arms, Dabholkar says with a chuckle.
— The Bad Doctor (@DOCTORATLARGE) November 17, 2016
Today, I am taking pledge that either I’ll die or live but will remove PM Modi from Indian politics: Mamata Banerjee pic.twitter.com/UIvZz5FOOG
— ANI (@ANI_news) November 28, 2016
— Asha Bisht (@AashaBisht) November 28, 2016
Ace investors have called demonetization a “game changer”
We can also come to the same conclusion as Bharat Dabholkar as to the merits of demonetization because all the eminent stock wizards have unanimously declared it to be a “game changer” for the economy. The experts have confidently advised that the time is ripe for us to aggressively buy stocks and assured that we will pocket huge gains in the foreseeable future.
“Huge positive” and “Best case scenario”: Kenneth Andrade
Kenneth Andrade, the founder of Old Bridge Capital, is renowned for his clarity of thinking and visionary approach.
I have earlier carefully examined his investment strategy and also discussed his favourite sectors and stocks.
In his latest interview, Kenneth Andrade was a symbol of ice-cool confidence as he systematically explained the salient terms of demonetization and how it would impact the Indian economy.
“It’s a temporary phenomenon and doesn’t change the long term pattern of how the economy will evolve” Kenneth assured in a soothing tone. He explained that the impact of demonetization over the GDP would be felt over a period of 12 or 18 months. “Things would stabilize after that” he added.
Deflationary environment would result in plunge in interest rates
Kenneth also explained that demonetization would lead to a deflationary environment and this would prompt the RBI and the Government to lower the interest rates with a view to stimulate the economy.
It is well known that lower interest rates always result in a revival of the economy and this leads to a commensurate surge in stock prices.
Why demonetization is the “best case scenario”
Kenneth Andrade gave a glimpse of his brilliant tactical thinking ability as he set forth the benefits that would ensue as a result of demonetization:
(i) As the economy shifts from a cash economy to a credit economy, companies with robust balance sheets and no leverage will continue to get higher market share in the segment that they operate in;
(ii) Such companies are able to provide credit to their customers as they are organized, aligned with the credit system and are de-leveraged;
(iii) Business which have high market share and a zero debt balance sheet can grow their market share disproportionately because the weaker section of the industry is going to collapse;
(iv) Such businesses will consolidate significantly faster than earlier.
This is not just because of demonetisation, but also because of GST, Kenneth added.
Kenneth also laboured the point that the government’s balance sheet would improve significantly as the falling interest rates would mean lower expenditure. At the same time, there would be a capital receipt from the RBI in the form of a write off of the demonetized cash which becomes worthless.
“This is my best case scenario for buying a company …. It is a huge positive” Kenneth added with a big smile on his lips.
Buy financials but avoid PSU Banks like the plague
It is implicit in Kenneth Andrade’s advice that lower interest rates would benefit bank and NBFC stocks.
However, he cautioned that investors should not be tempted to invest in PSU bank stocks owing to their rock-bottom valuations.
“They are not efficient allocators of capital …. there is nothing structural with these companies …. over periods of time they continue to suffer from a loss of market share” he said in a chilling voice.
“Over a long period, PSU Banks have just destroyed capital. So I would rather look at a well-run financial services company than play a valuation bet in some of these names”, he added.
Avoid consumption stocks
Kenneth warned that the impact of demonetization of freezing liquidity would adversely affect consumers and the consumption economy and that we should stay away from these stocks.
This chilling forecast was corroborated by Harsh Mariwala, the visionary founder of Marico. He stated that the sales in November are affected by a whopping 20-25%.
Currency purge impacts Marico’s November sales by 20-25% @sharleendsouza
— BloombergQuint (@BloombergQuint) November 26, 2016
It is also notable that several consumption oriented stocks such as Havells, Page Industries, Titan Industries etc have been clobbered out of shape as a result of demonetization.
(Image credit: ET)
However, several eminent experts opined that the sharp erosion in the stock valuations has made these stocks attractive for long-term investors given their strong dominance over the market place.
Top Ten stocks that are immune to the evil effects of demonetization
Kshitij Anand of ET has conducted a meticulous assessment of several stocks and identified ten stocks which he claims are “immune” from the side-effects of demonetization.
These ten stocks are HDFC Bank, SBI, Aurobindo Pharma, Apollo Hospital, KNR Constructions, Tata Consultancy Services, Infosys, Dr Reddy’s Lab, Lupin and Wipro.
Kenneth Andrade’s analysis of the impact of demonetization on the economy and the stock market is convincing and is commensurate with the opinion of the other stock wizards. We also need to shed our inhibitions and aggressively buy stocks to take advantage of the fallen valuations!