Demon of Demonetization

Prior to demonetization economy and markets were well poised for an up move. Good monsoon, pay commission, lower interest rate, falling inflation, adequate liquidity and stable currency were supporting this move. In our opinion demonetization changed direction of the economy. Sudden withdrawal of legal tender disrupted trade channels and consumers equally. There has been sharp contraction of credit and it has hit a six decade low of 5.1%. Healthy credit growth is a pre-requisite to support strong GDP growth. In our opinion it will take longer than market expectation for situation to stabilize.

Cash crunch in the economy has already started impacting consumption. Early numbers of November and December ‘16 are showing some signs of stress in auto sales number. In our PMS strategies we are primarily focused on consumer and manufacturing. Both have been severely hit due to demonetization. 2016 was a consolidation year for us after six phenomenal years of performance. FII flows slowed down in 2016 and they started selling aggressively post demonetization. It was a stressful situation till December 30, 2016 with very high level of confusion among market participants.

Sudden MCLR (lending rate) cut by SBI to the extent of 0.90% followed by other banks changed the market outlook once again. This rate cut will have positive impact on consumption and disposable income in hands of people will increase. Majority of our holdings started stabilizing post rate cut and they have now started outperforming the market. We have a negative view on banks and with sharp rate cut and contraction in credit growth it’ll build lot of pressure on banks. Banks being largest contributor of index can put downward pressure on the same. With this in mind we sold Kotak Bank and have completely cut our position in banks. In our opinion situation will remain fluid for market with a downside in banking stocks.

We still believe that demonetization will have far reaching structural impact on the way business is conducted in India. Formal sectors and tax compliant companies will gain over a period of time. Most of our clients have shown resilience in these turbulent times. Any correction from these level can create great opportunity to buy good growth companies in India.

Wish all of you a Happy & Prosperous 2017.