Markets have been volatile over the last few weeks and the PM’s announcement that 500 and 1000 rupee notes would cease to be legal tender effective from midnight on the 8th of November added fuel to the fire. The US elections were on that day and results were to be declared on Wednesday. Readers would recall that global markets had reacted on the 1st and 2nd of November when Donald Trump had taken a lead in the elections.
It’s a different story that the Dow Jones has hit an all-time high when it closed on Friday. Dow gained an impressive 959.38 points or 5.36% to close at 18,847.66 points. This is post-election of Donald Trump as the 45th President of United States and just 10 days ago the market had reacted because he was in the lead. Strange are the ways of markets.
Our markets post the demonetisation had a huge intraday fall with the BSESNSEX losing a massive 1,800 points and NIFTY about 540 points. They recovered about 4/5th of the same and ended the day with losses of about 300 points on the SENSEX and 110 on the NIFTY. Thursday they gained all of that as well but Friday because of weakness in global currencies, markets cracked again.
What is significant is that the lows made on Wednesday saw the markets reach levels registered in June 2016. The ensuing rally from there took us to the highs of 29,077 on the SENSEX and 8,968 on NIFTY on the 6th/7th of September. The time taken for the rally and the correction are almost equal and we are effectively back to square one. The bounce from the lows was swift and significant but markets have lost momentum.
The effect of demonetisation would be felt on the economy and there would be a setback in the short term in results for the quarter October-December 2016. The sequence of events indicate that GST is on track and would be implemented with effect from 1st April 2017. This would imply that we would again see industry suffering some sort of setback in March 2017, pre GST introduction. In short one should wait for the next financial year to look for the turnaround.
Winter session of parliament begins next week and the opposition would want to target the government on demonetisation. With some parties already supporting the government like the NCP, JDU and SP, the battle is cut out for Congress and TMC who are opposing the same. The step of keeping banks open on Saturday and Sunday has definitely eased the situation and announcement that limits on withdrawals have been increased from Monday would send strong signals to comfort the public.
If one were to look at the sequence of events where the first thrust was on financial inclusion and the world’s largest program was initiated under the JAN DHAN YOJNA. While most people thought the program was a loss making proposition for banks, it turned out a success when the money remitted also saw transactions under the insurance and pension schemes. The CASA being earned from these accounts is decent and is helping banks.
The above was followed by the income declaration scheme and after the closure of the same the demonetisation of big currency notes. Almost 86% of the total currency under circulation comprises of 500 and 1000 rupee notes. It would be safe to assume that almost 20% of the large notes would not come back into the system. While sceptics would argue that the multiplier effect of the cash economy would be lost, the puritans would argue that with GST round the corner nothing would be lost as people would be forced to become compliant.
At the same time there was fake currency, terrorists using the currency and also drug mafia. One must not forget the corruption and the nexus between bureaucrats and politicians which had made life difficult for the common man. While there would be sacrifices and hardships encountered by the common man it would be far less than the long term benefits to be realised from this move. Inflation would be under check and prices tend to be softer.
The Tata-Cyrus Mistry spat is getting dirty and looks like being there for a long time. EGM’s are being summoned to seek the ouster of Cyrus Mistry after some independent directors supported Cyrus. What is right and what happened will take time to be made public but in the intermediate the Tata group shares would be under pressure.
Coming back to the markets, with results not to impressive and short term setbacks as explained earlier, they would be under pressure. The momentum has been broken and FII’s continue to be sellers. There sales have been significant in the last 5-7 days and it would take some time for the trend to reverse. Secondly markets do not do much when parliament is in session.
It would make sense to stay away from dabbling in the markets currently. Be selective and choosy when bottom fishing as that could give some returns.
