Impact of demonetization in changing pattern of investment industry The latest entry into the illustrious Indian history books, November 08, 2016 is a day that India will remember for time immemorial. On this day, a bold government took a very bold decision to demonetize Rs.500 and Rs.1000 notes effective midnight that day under the able leadership of PM Narendra Modi. Following are some of the main objectives behind the move:
To free India from the menace of black money To drain counterfeit currency out of the system To make India a ‘less cash’ economy while making it easier for people to transition into a ‘cashless economy’, going forward. To reduce fiscal deficit by redirecting black money into the system To legalize real estate transactions To encourage more people to open bank accounts To encourage unorganized traders/businessmen to deposit money into bank accounts
Let us now analyze the impact of demonetization on the investment industry:
Real estate sector Real estate was the worst hit sector by demonetization among all the other sectors. As per general market estimates, people transact around 10% to sometimes half of the property value in cash. Althoughdemonetization would not affect the primary residential market, where people buy properties throughhome loan/mortgage,it would affect outrightpurchase and sale transactions with high cash margins. This huge range of cash margin in property dealings exposes real estate companies to potential revenue losses. Therefore, this results season, investors would be watching the revenue impact on real estate stocks such as Godrej Properties, Prestige Estates, Indiabulls Real Estate, and DLF closely due to demonetization. These companies would be taking a hit owing to larger unsold inventories. Moreover, real estate deals in the tier 2 and tier 3 cities would see a major impact of demonetizationowing tohigh cash margins in dealings. That said, the real estate sector is optimistic about the prospects of things moving forward in the long run. Top players feel demonetization may lead to short-term pain, but would surely provide them and the people of India with long-term gains. Steel and cement sectors would also be reeling under the impact of demonetization owing to their strong linkswiththe real estate and construction sectors.Thus, the steel and cement sectors can turn credit negative for a brief period.
Auto sector In the auto sector, the impact of demonetization could be seen clearly through the fall in December sales of the mini and compact segments of Maruti Suzuki. Moreover, the two-wheeler segment, where cash dealings are prominent, was affected by demonetization. Therefore, this earnings season, investors
would be closely watching the revenue performance of auto majors such as Maruti, Hero MotoCorp, HMSI, Bajaj, Eicher Motors, and Ashok Leyland, to understand the impact of demonetization on their revenue. Demonetization has hit the sales of second-hand vehicles.This would have a spiraling effect on the Original Equipment Manufacturers since buyers would not find it easy to sell/replace their old vehicles.
Consumer durables sector Indians generally tend to buy luxury and high-end retail goods such as electronics, furniture, and mobile phones by paying in cash. Owing to demonetization, consumers would have to go slow on their discretionary spending, which would impact the consumer durables sector in the short term. This earnings season, investors would be closely watching the revenue performance of companies such as Whirlpool, Blue Star, Godrej India, Videocon, and Philips to carve out a future investment strategy.
Mutual fund investments could see big inflows The increase in cash flows and liquidity in the banking system owing to demonetization would benefit mutual fund industry. Popular for high, post-tax returns in the long term, mutual funds would see higher inflows owing to demonetization. The prospects of GDP improving in the long term and corporate earnings expected to get better would boost the Indian equity markets. Mutual funds would be the direct beneficiaries of this market growth. Thus, retail participation in the markets through mutual funds would increase, benefiting the investors as well as the mutual funds. To know more about diversified investment options through effective financial planning, call us on 222858 4545 or write to us at http://www.investmentz.com/