This week our stock markets were hit by two unexpected events. First, the announcement of demonetization of Rs 500 &  1000 notes on Tuesday night by the PM and then by the win of Donald Trump in US elections which many media analysts had considered nearly impossible. Our markets have taken the demonetization of currency very badly and we have been under-performing most major global markets massively since then.  In this post i put forth my views on  impact of this drastic move of the govt on stocks across sectors-

GDP Growth

Our GDP growth is likely to take a big hit in the near term. We may see a 10% de-growth in current quarter because of this sudden move of demonetization by the govt.For the full year of FY17, we may just end up with growth of 3-4%.But things should recover by next fiscal and we may see growth of even 8-10% next year because of the low-base effect.

Real Estate

Home prices will fall massively as a result of crackdown of black-money and may even take a decade to get back to previous highs. Lots of real-estate companies were already under severe financial stress and were struggling to give possession of flats to home-buyers from whom they had taken advance payments.Things will only get worse for these companies with little hope for revival. I’ve always been negative on this sector and continue to remain bearish as home prices will crash and then won’t recover for years because of demonetization.

Cement

This sector has been all promise and hardly any delivery when it comes to profits with exception of Ultratech and Shree Cement that trade at very high valuations. Even ACC & Ambuja have  disappointed when it comes to profit growth in recent times.

Some midcap names keep running up & down massively according to market sentiment but have high debt and even show losses in bad quarters, hence they don’t merit a long term buy & hold strategy. I sold our only cement stock several months back.

Paint

I heard absurd arguments that paint companies will do badly because real-estate will suffer. I have a contrarian view. I believe that with falling home prices, people will have more money to paint their houses.More importantly, crude oil prices have fallen over 15% from recent highs in last one month. Thus low raw material prices should be good for this sector.

Infra

Again a sector plagued with high debt and a track record of wealth destruction. Sector struggled with high leverage for years.I consider most of these popular stocks  avoidable  as an investment.I’m  not buying in times of market mayhem for sure.

Banking

Demonetization is great for banking stocks as it will result in a  flood of low cost funds for them, especially the struggling  PSU banks that have crores of zero-balance idle Jan Dhan accounts. As a result, most banks will soon start reducing deposit rates. RBI may cut rates aggressively too in days to come as demonetization will kill all inflation for a long time.With time, lending rates of banks will also come down. I believe  fall in lending rates will continue to be slower  than that of deposit rates as banks will try to bump up margins to make up for their NPAs.

Housing Finance

Stocks of housing finance companies had been on a tear for past several month. Valuations were getting overextended in some cases. All kinds of stocks in this sector were running up irrespective of management quality or track record. The current times of crisis will again help separating the great lenders from the ordinary ones.  Falling interest rates and falling home prices will increase demand for home loans as real-estate becomes somewhat affordable again for the common man.

Concerns about Loans Against Property are overdone according to me. It is absurd to believe that people will suddenly start willfully defaulting on loan EMIs and prefer to become homeless just because property prices fall by 20-30% for some time.

Builder loans are however a sticky issue for these companies and can turn to NPAs. In my opinion, it is best to avoid companies having high exposure to builder loans.

To conclude, i don’t expect any serious earnings impact to good stocks from this sector. However if markets fall, stocks may correct to somewhat more reasonable valuations.

Microfinance

MFIs can take a serious short term hit because their operations are largely cash-based and have been severely hit by demonetization. Some have even stopped taking repayments of loans for some days. However, things should  return to normalcy in a week or two. These stocks may see a 50-60% dip in Q3FY17 profits from what everyone was expecting pre-demonetization before normalcy is restored by Q4. I believe short term troubles are unlikely to change the long term growth prospects of this sector.

Auto

I was reading today that more than half of two-wheeler sales are in cash-based transactions in our country. Hence they can take a big hit in near term. However majority of car purchases are through banking channels so it will face a lesser impact. Same for commercial vehicles. hence two wheeler stocks, which were already posting single digit volume growth in recent months may take a hit i sales for a while. However most of these are huge brands that have been around for decades. So one or two bad months won’t make any difference to these cash rich companies. Fall in stocks like Bharat Forge and Motherson Sumi, which we hold also doesn’t make any rational sense to me. These companies get bulk of their revenue from abroad and hence face minimal impact of demonetization according to me.

FMCG 

Expecting sharp fall in sales for 2-3 weeks and then slow normalization by end of this fiscal year as people can’t go on without basic goods for long. Major impact will only last till people are struggling to convert old notes to new ones. However companies that were expected to post 10-15% profit growth for FY17 may end up reporting single digit growth. Analysts may  cut unrealistic growth expectations for this sector to more realistic levels. Short term pain but no impact in the longer run according to me.

IT

I have been bearish on IT stocks for a long time. With INR sent to get stronger in long term because of disinflation, and victory of Trump in US elections, there seems no end to the woes of our IT companies. Even though blue-chips like TCS and Infy are at 52 week lows now, still an avoid in my view as i  wrote here.

Pharma

I see hardly any impact on the big pharma stocks as most of their revenues & profits are derived from outside India. Unlike the tech stocks, this sector is far more robust to be impacted by currency fluctuations. Most of the pharma stocks i track have reported decent q2 results.I believe the current correction only makes them even more attractive investment than they were when i wrote about this sector in my previous blog here.

Nfty tgt of 11000-

I first mentioned possibility of 11000 for Nifty by 2017 this past March when the index was near 7400.From there it went up 20% to 8960. However  taking into account recent unexpected events,the index may no show enough earnings growth net year to justify 11000, but i am still optimistic about it hitting all time highs next year.

Demonetization is bound to create several more opportunities for honest enterprise to prosper by taking away the advantages enjoyed by cronies with large amount of black-money and provide a level playing field for all. I believe the next decade can give us far more multibagger stocks than we have seen in last 70 yrs.

Disclaimer- Views personal.Can be wrong in my assumptions. Me & my family members may have holding in stocks discussed here.