Impact on your investments with Demonetization and Donald Trump's victory

The victory of US presidential candidate Donald Trump led to a panic among a section of investors. The early anxiety, however, gave way to a healthy market rally. The same day, the Indian Prime Minister announced demonetization of old Rs. 500 and Rs. 1,000 notes. This event too has led to increased market volatility. The effect of the two event is spread across asset classes. Let’s see what it means:

EQUITIES, Realty, housing finance lose out; banks, chemical firms could gain.

The BSE Sensex opened with a massive loss of 1,300 points the day after Trump won the US presidency and the demonetization move was announced, but recovered later. It rallied on and reported net gains for two days of trading, only to drop 700 points the next day. The global unfolding of these two events and with market jitters been unearthed, it presents a value buying opportunity. However, the influence of these actions is not over and stockholders shouldn’t disregard them. The ripple effects of demonetization cannot be understated. There are major industries in India that thrive on a parallel economy funded by black money.

Though the government is exchanging old notes with the new ones, the currency circulation in the short-term could be squeezed. There may be a negative effect on the GDP in the last quarter, as consumption shock gets spread into the system. Some rupee appreciation in the forex markets is also expected as notes in circulation will decrease.

Our export-oriented sectors may suffer if the RBI and the government don’t step in to ease the liquidity situation.

On US presidential elections: Global markets have been unpredictable over the previous few weeks. That uncertainty is over now with Donald Trump’s becoming the President of US.

As the markets track news on the policy front from Trump, the focus will now turn towards the US Fed policy meet which is due next month. The 10-year bond yield in the US has gone above 2%, after a gap of eight months, and the market has started factoring 80% chance of a rate hike in December. This means volatility will return soon.

Taking a closer look at specific sectors, starting with real estate, it is best to avoid realty stocks as the sector will be among the worst impacted by the move. The housing finance sector which is a big contributor, inevitably, will also be under pressure. They are likely to onlooker some stress on loans given to real estate developers who are likely to face a liquidity crunch in the short term.

There could be a permanent wealth destruction of Rs 3 lakh crore even if 20% of the existing Rs 500 and Rs 1,000 notes are not exchanged. This could impact sectors such as jewelry, real estate and banks. Business domains with exposure to unaccounted wealth should be avoided.

Investors should be wary of sectors such as real estate and jewelry.

The high-end consumer segment will also be impacted with short-term disruption and wealth erosion. As this move represents an erosion of real wealth to a large number of people, the luxury goods market is likely to get affected. This will be felt more in luxury cars, SUVs, gems and jewelry and high-end branded products. The consumer non-durables sector is also likely to face some heat. The effect will vary for high- and low-value items. While the impact on small-ticket discretionary spending will likely be minimal and short term, high-value items can experience long-term impact.

The BPO and the IT industry may suffer since Trump repeatedly said that his government will stop jobs from leaving the US. The IT sector could remain under pressure, at least in the near term as Trump has talked about restricting entry of skilled labor from overseas countries to protect jobs in the US.

On the plus side, some export-oriented sectors may benefit if the next US president maintains his view of China as a potential adversary and increases imports from India.

Indian specialty chemical companies could stand to gain further.

Banks will be the biggest beneficiaries of the demonetisation move since most of the cash in circulation now will be converted to bank deposits. Banks are expected to benefit because of more deposits, especially low-cost deposits. Though all banks will benefit from this, investors should focus on banks such as HDFC, ICICI that are strong and can leverage the ongoing changes to their advantage.

GOLD

Price has spooked. Experts view it as a long-term investment option Gold has been among the most seriously impacted asset classes by the twin events. Safe haven assets like Japanese yen and gold have rallied on Trump’s victory, but gave up most gains later. So, one can assume that the knee-jerk reaction is over now. The demonetisation move also boosted Indian investment sentiments vis-a-vis gold. This move has reinforced Indians’ belief in gold as a safe haven asset. Global uncertainty is increasing, so we are bullish on it, in the long-term.

DEBT

Investors to take advantage from falling inflation and likely rate cuts. With the rupee remaining relatively stable, the debt market has reacted positively to both Trump’s victory and the demonetisation move.

Bond prices may remain high. Reason can be contributed to the deflationary impact of demonetisation. We are likely to see some weakening in inflationary pressures as demand comes down in the short term. This will also keep prices in check as the ability to hoard commodities and other assets will be greatly reduced.

Improvement in government finances due to shift of the black economy to white—increased tax compliance and better revenues for government— is another positive aspect. The debt market has also started expecting further rate cuts, which, again, is good news for debt investors. With the household inflation expectations coming down, the possibility of rate cuts is increasing.

REAL ESTATE

Buyers to benefit from the expected fall in home prices.

The real estate sector is the biggest receiver of black money, so it will take a massive hit.

The short-term impact on the sector could be very serious. The number of transactions and prices in residential and land markets may see a substantial downward trend.

The impact will be felt across the board with tier-2 and tier-3 markets taking a larger hit.

The long-term outlook, however, looks bright. Demonetisation will erode the use of cash and lead to increased transparency in realty transactions. Land acquisition is another place that has a large black money component. With the black money component going away, land prices will fall gradually. This will ultimately benefit the end users by bringing down per square feet prices.