2 weeks of cash pain to mean 20 years of Growth in “Nation”

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The domestic equity market has not taken a breather yet after the Modi government did the unexpected, by demonetising high-value currency notes of Rs 500 and Rs 1,000 denominations to curb black money.

Some analysts said the move will hurt India’s growth while others claim the bull market in equities, which started in 2013, would now resume in the small cap and midcap segments.

The demonetisation drive is likely to hit India Inc in terms of demand, as well as supply, which would take a toll on their earnings at least over the next two quarters. But nobody seems to be complaining.

“Demonetisation won’t ‘stop’ corruption and black money, but it’s one of the steps (the only one painful to every citizen) initiated by the nation!,” Porinju Veliyath, MD & Portfolio Manager at Equity Intelligence India said in a tweet.

Veliyath, who is bullish on the India story, said that the pain would last at least two weeks more, but in return, it would bring in 20 years of gain. It is a rare opportunity to pick value bets in Indian equity market. “Look for stocks with long -term earnings visibility and identifiable near-term setbacks,” he said.

“The historic bull run in small cap and midcap stocks since 2013 will resume and continue going forward. Look for companies with a changing management profile in the new economic environment,” Veliyath told ETMarkets.com.

Equities are likely to deliver best returns in the next decade as a gush of money in banks will bring down interest rates on fixed deposit. Real estate might not go anywhere as well as gold. Hence, it is advisable to allocate money to equities as well as debt products, he said… 2-weeks-of-pain

A good portion of the impact from demonetisation has been factored in by the market swiftly. The Nifty50 is down 5 per cent since the announcement.

“Going forward, any further negative impact from demonetisation will purely depend on the time of adjustment or recovery of liquidity, which is expected to be a matter of over one to two quarters,” Vinod Nair, Head of Research, Geojit BNP ParibasBSE -0.71 %, told ETMarkets.com.

F or example, the stock market was expecting good earnings for H2 of FY17 at about 15 per cent for the Sensex, which is now being downgraded. “The overall impact on the blue chips will be limited. Let us also assume that this growth gets halved to 7-8 per cent in FY17, but maintains the buoyancy of FY18,” said Nair.

At its current level, the market is available at a fair valuation and hence one should start nibbling into high-quality stocks, Nair said.

In recent times, FIIs shifted into a cautious mood on emerging markets due to increasing US bond yields. The rupee has depreciated by over 2 per cent in the last one week, to Rs 68.18.

This trend is likely to continue in the near term, or at least till the FOMC meeting in December and as new US President-elect Donald Trump will take time to understand the trajectory of the Fed rate in the long run.

“Make volatility your friend, don’t get fearful! Every sharp fall has, in hindsight, turned out to be the best opportunity to invest!,” Sunil Singhania, CIO for Equity Investments at Reliance Mutual Fund, said in a tweet.

Economists, on one hand, say the India story is likely to take a hit in the near term. Analysts on D-Street, on the other hand, the step taken by the government and the near-term pain has a lot of long-lasting benefits for long-term investors.

HDFC BankBSE -1.41 % expects India’s GDP to grow at 7.3 per cent compared with the earlier estimate of 7.8 per cent. CARE Ratings has slashed its projection for gross value added (GVA) to 7.1-7.3 per cent from 7.6 per cent.

“One has to understand that there will be pressure in the near term due to liquidity crunch, but one also has to see that lakhs of crores of rupees are going to flow into the banking system, which is going to positively impact interest rates and GDP growth,” Vaibhav Agrawal, Head of Research & ARQ, Angel Broking, told ETMarkets.com.

“Once the pain gets over, we are going to see improved conditions to conduct business. So this pain is worth it in the short term. In fact, demonetisation is going to benefit the organised sector and one should use this correction to buy largecap stocks, which are available at a decent discount,” he said.

Bringing down the amount of black money in the economy will help reduce pricing parity and inflation. The economy will see a higher growth momentum as the liquidity gets distributed among a larger number of people, experts said.

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