DEMONETISATION is likely to put the Indian market into a period of uncertainty which can last for three to four months. A report released by credit rating agency Fitch points out that the government’s move will have a negative impact on home-builders over the next 12-24 months. The impact will be seen in the secondary market for all asset classes.
Most investors think that an immediate positive effect would be on banks as they will have higher liquidity. Also, with the slowdown in the economy, loan takers will be fewer and much credit growth cannot be expected. Financial services and consumer discretionary segments like automobiles will be the worst hit as the demonetisation move will hurt consumer sentiment as well as the wealth multiplier effect.
Demonetisation may be structurally positive for India, but it may weigh down on the country for a few months.
Investors need to safeguard themselves as volatility is expected to increase and we may see erosion of wealth in the stock market.
Investors should shuffle their portfolio. As real estate companies are likely to suffer and face a slowdown for at least a couple of years, investors should stay light in stocks of real estate companies. Non-banking finance companies (NBFCs) are trading at high valuations and demonetisation will have a negative impact on them. Investors must look at profit booking and stay away from stocks of this sector for some time now.
Another indication that interest rate is going to fall is seen from the fact bond yields are at a seven-year low. That indicates that we may see a rate cut this December from Reserve Bank of India. With a falling interest rate scenario, it is better to divert some fund into bonds which are safer in the falling market environment.
Second, it is very likely that the government will try to stimulate the economy by putting money in the hands of rural consumers and low income groups. One of the sectors that may benefit by this move is consumer staples. So investors should focus on this sector.
Also, to stimulate the economy and compensate for the disruption caused by demonetisation, the government may, in the coming Union Budget, raise investment in infrastructure like roads and railways. So, segments that are directly related to core infrastructure could, in fact, see a spurt in investments from the government and that is where investors should selectively start investing.
Some amount of allocation should be done in debts like bond market. Profit booking should be done in shares of companies that will majorly bear
the negative impact of demonetisation while additional allocation should be made in those sectors which are expected to get the government’s investment push.
Dhruv Desai, the writer is director & COO, Tradebulls Securities