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Demonetisation - The bigger picture

Demonetisation - The bigger picture

Alpha Edge, November 2016 - Black belted

Indian markets hit turbulence with two ground breaking news recently. One was of partial demonetization announced by Prime Minister Narendra Modi to rein in black money, which in our opinion is one of the boldest move by the current government and showcases the clear intent of the government towards bettering the economy. The second news that rattled the markets was of Donald Trump winning the US elections defying the polls that clearly gave Hillary Clinton the lead before US went in to voting. With the new developments, going forward we expect the volatility to continue or even rise warranting market participants to be on their toes. 

Globally, last month, markets around the world ended the month in negative due to rising anxiety w.r.t. the US presidential elections and perceived shits in global central bank policies and generally rising inflation expectations. With economist world over questioning efficacy of the recent monetary policies it seems like the central bankers too are re thinking their strategies. Last month we saw a change of tone from ECB. And in a surprising move Bank of England and Bank of Japan chose to hold their interest rates steady. In totality it will be tough months ahead globally as markets brace for US presidential, higher interest rates given the probability of a Fed rate hike in December is increasing, add to that the reducing intensity of rate cuts going forward.

Back home, we saw mixed numbers as IIP was still in negative territory although latest manufacturing PMI and service sector output strengthened. We did see rate cut by RBI at the beginning of the month. Rate cuts have become more of a sentiment booster rather than anything else. We have seen 150 bps of rate cut until now since Jan 2015 with fundamentals barely showing improvements. Another gauge of demand in the country is the credit growth to industrial sector which is still low showing excess capacities and unwillingness of private sector to take loans for expansion until demand picks up and current capacities are fully utilized. W.r.t. Q2 FY17earnings we have seen few companies come out with their results and many beating estimates. IT and banks has so far disappointed. Unlike the expectations with respect to the NPA issue of banks the worst doesn’t seem to be over. Overall volume growth is still lacking and now with commodity prices recovering, margins may again get squeezed warranting a growth in topline to drive bottom line.

 

With the new demonetization decision taken by the government we expect chaos to follow for some time before things fall into place. In the meantime, this development could hit consumption, especially rural consumption, given the large part of the transactions are cash based. This could mean further delay in the earnings recovery that we were hoping contributed by revival in rural consumption given good monsoons after two years. However, kudos to the government for taking such a bold move and Belting black money where it hits the most.      

 

Click here to read the report

Alpha Edge, November 2016 - Black belted

Indian markets hit turbulence with two ground breaking news recently. One was of partial demonetization announced by Prime Minister Narendra Modi to rein in black money, which in our opinion is one of the boldest move by the current government and showcases the clear intent of the government towards bettering the economy. The second news that rattled the markets was of Donald Trump winning the US elections defying the polls that clearly gave Hillary Clinton the lead before US went in to voting. With the new developments, going forward we expect the volatility to continue or even rise warranting market participants to be on their toes. 

Globally, last month, markets around the world ended the month in negative due to rising anxiety w.r.t. the US presidential elections and perceived shits in global central bank policies and generally rising inflation expectations. With economist world over questioning efficacy of the recent monetary policies it seems like the central bankers too are re thinking their strategies. Last month we saw a change of tone from ECB. And in a surprising move Bank of England and Bank of Japan chose to hold their interest rates steady. In totality it will be tough months ahead globally as markets brace for US presidential, higher interest rates given the probability of a Fed rate hike in December is increasing, add to that the reducing intensity of rate cuts going forward.

Back home, we saw mixed numbers as IIP was still in negative territory although latest manufacturing PMI and service sector output strengthened. We did see rate cut by RBI at the beginning of the month. Rate cuts have become more of a sentiment booster rather than anything else. We have seen 150 bps of rate cut until now since Jan 2015 with fundamentals barely showing improvements. Another gauge of demand in the country is the credit growth to industrial sector which is still low showing excess capacities and unwillingness of private sector to take loans for expansion until demand picks up and current capacities are fully utilized. W.r.t. Q2 FY17earnings we have seen few companies come out with their results and many beating estimates. IT and banks has so far disappointed. Unlike the expectations with respect to the NPA issue of banks the worst doesn’t seem to be over. Overall volume growth is still lacking and now with commodity prices recovering, margins may again get squeezed warranting a growth in topline to drive bottom line.

 

With the new demonetization decision taken by the government we expect chaos to follow for some time before things fall into place. In the meantime, this development could hit consumption, especially rural consumption, given the large part of the transactions are cash based. This could mean further delay in the earnings recovery that we were hoping contributed by revival in rural consumption given good monsoons after two years. However, kudos to the government for taking such a bold move and Belting black money where it hits the most.      

 

Click here to read the report

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