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November 7 – November 11, 2016
In the last week there were corrections in the market. Large cap indices have fallen close to 4-5% where as mid
cap indices have fallen almost by 7-8% till date. These corrections happened on account of two major events
which were 1) US Presidential Elections 2) Demonetization of 500 and 1000 rupee notes.
The objective of demonetization is to fight against black money or unaccounted money. Almost 25% of India’s
wealth is in the form of black money which ranks among the top five in the world with China and Russia being the
top two. Hence this move is highly significant. The 25% black money in the country has induced the interest rates
to remain artificially high in the system.
There is almost 100 trillion worth of deposits into the Indian banking system and roughly around 17lakh crores of
the currency is in circulation of which 86% is in 500 and 1000 rupees notes. The amount of currency which is in
circulation but does not come back into the banking system is like derived profit for the Reserve Bank. Hence it is
expected that even if one third of this currency does not come back into the system it would literally be equal to if
not greater than the fiscal deficit of the country. This is something big.
The money that comes back into the system for instance the 5 lakh crores worth of money which came back into
the banking system with SBI alone accounting for 1 lakh crores is surplus liquidity for the banking system. Thus
there would be negatives for quite a few sectors particularly the cash sensitive sectors. However, it would be
positive for banking and in the long run it would be positive for the rate sensitive sectors.
When there is inflow of such large sums of money into the system, inflation and interest rates come down because
credit growth is around 10-12% but deposit growth rate is high. In order to reduce the deficit, interest rates will
come down and as rates come down the whole money would be pumped back into the economy. This leads to
revival of the economic cycle.
In the near term it is going to be negative for cash sensitive sectors which include real estate developers, gems
and jewelry, travel and tourism, hospital and to some extent housing finance companies. Sectors like
infrastructure, automobiles and banking will become positive in the medium to long term. GDP will also be
negatively affected because spending has reduced. GDP will show negative growth for a quarter or two but in the
long run i.e. FY 18 – FY 19 it will become positive.
In the near term there is going to be uncertainties on account of US Presidential Elections and Donald Trump’s
victory. He is a pure trade man who believes in protectionism. With him winning and coming in to power dollar
US bond yields crashed and came down to 2% which also meant that emerging market economies would crash
which they did whether it was Indonesian Rupiah or Malaysian Ringgit or even Indian Rupee which lost more than
60 bps in one day. Emerging market currencies fell, the dollar index shot up and US yields also shot up because
Trump is believed to be a man who would stroke inflation and all his polices would be inflationary in nature. It is
too early to comment on what his polices would be but, based on current opinions one must have a cautious view
on the IT sector and a positive view on pharmaceutical and commodities. Since he wants to revive the
infrastructure sector it will give a boost to the commodities cycle.
Based on US elections one can be positive on pharmaceutical and infra sectors. In between there were small
events such as October PMI coming at a 2 year high, China gaining growth, India IIP at .7% indicating some
expansion coming into picture but the two key events are much bigger and it overshadows the smaller events.
Markets in the near term should remain cautious and if one really wants to guess with regards to levels, 7800-
8000 would be a support zone in the near term. Last week during the panic period Nifty touched 8000 which can
be considered as a near term support. However, rather than thinking about near term, one has to focus on the long
term. On account of the two events FY18 and FY19 will become good for the Indian markets and long term
Industrial production grew a meagre 0.7% in September mainly due to poor show by manufacturing and
mining sectors coupled with decline capital goods output. The factory output for the April-September
period of the current financial year declined by 0.1% compared to 4% growth in the year-ago period, as
per the data released by Central Statistics Office.
India’s wholesale inflation rose to 3.39 percent in October year-on-year, marginally lower than the
previous month’s 3.57 percent. Food inflation moderated to four month low of 4.34 percent aided by fresh
arrival of seasonal vegetable supplies, official data showed.
The German economy likely expanded moderately in the third quarter despite the sense
of uncertainty created by Britain's vote to leave the European Union - a sense now added
to by Donald Trump's victory in the U.S. presidential election, according to the Economy
More Chinese banks want to set up shop in London despite the Brexit vote which has
prompted foreign lenders in the capital to consider bases in continental Europe. British
and Chinese government officials met in London to unveil a "strategic plan" to deepen
financial and economic ties between the two countries.
The International Monetary Fund said it looks forward to working with the
Trump administration and believes the United States will remain fully
committed to the Fund and other international institutions.
President Barack Obama said he would reassure US allies during his trip
overseas this week that Republican President-elect Donald Trump plans to
maintain core US strategic relationships around the world, including with
GChina's economy largely showed further signs of steadying in October as
expected, but disappointing retail sales growth and fears of U.S. trade
frictions under incoming President Donald Trump are increasingly clouding
China's producer prices jumped more than expected in October as prices of
coal and other raw materials surge in the midst of a supply crunch and a
pickup in the economy. Consumer prices also beat expectations,
accelerating to a six-month high, though analysts say the room for further
rises is limited.
Crude (Rs. per BBL)
Gold (Rs. Per 10gms)
Gilt Yield in % (Friday)
Change in bps (Week)
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