Demonetization Impact on the Stock Market and Stock Investors

What will be the Demonetization Impact on Stock Market? asked one of the readers of this blog. Though i am not a SEBI registered Investment Adviser, therefore, cannot suggest stocks but i can always share my views. At the macro level from a sector perspective, the stock market is zero sum game until unless there is dire need to exit the stock market. For example, suddenly the FII buying stopped and they become a net seller. In such a scenario, the retail investors should exit the market. At the end of the day, retail investors will lose money in the stock market if FII’s exit.

Under normal conditions, the investors are bullish or bearish on certain sectors. The overall bullish trend in the stock market does not mean that all the sectors are expected to perform well. For example, PSU and metal stocks are underperforming despite bullish trend. I will pull out money from IT/Pharma and put it in Banking/Auto. Therefore, i mentioned it is a zero-sum game. It all depends on the sentiments and the judgment of the fund manager and investors how the sector is expected to perform in future. Every news/change in macroeconomics/change in govt policies impacts the investor’s sentiments specific to the particular sector. For example, post-GST implementation, experts were bullish on logistics stocks. Similarly, after implementation of 7th pay commission, the experts were bullish on Auto and White goods.

In my opinion, demonetization impact will be far reaching on stock markets and stock investors. At this stage, things are not 100% clear and more clarity will emerge with the time. In my opinion, in the stock market, only those investors can make money who can correctly gauge what’s coming your way. Though it is a no-brainer. I also did some study on demonetization impact on the stock market and thought of sharing my observation with the readers of this blog. Let’s check out

Demonetization Impact on the Stock Market and Stock Investors

At the macro level, the cash dependent and consumption based sectors will be negatively impacted. On the other hand, the financial sector will be the biggest beneficiary.

1. Banking:

In my opinion, banking will be the biggest beneficiary of demonetisation. Banks are flush with the money. The only catch i foresee if the bank is not able to lend/deploy this money effectively or NPA’s increase. The demonetization is the beginning of digital payment era. The govt will take all steps to make India a cashless economy. It will also positively impact the operational efficiency of the banks.

In future, we will need less no of branches and over the counter banking may be thing of past. Though it is very futuristic. The reason for optimism is a sharp increase in digital payments. The UPI and Mobile wallets offered by the banks will support digital payment. Also, as i shared in my previous posts that i am anticipating govt will reduce the limit on cash transactions to 2L or 3L for all types of transaction and may also limit the cash holdings per person. It will further fuel the growth in digital payments.

In banking, i personally avoid banks with high NPA. In the current scenario, there are very limited quality banking stocks. To summarize, all the banking stocks may not be benefited from demonetization impact. If you can identify rights stocks at this stage then you are home.

2. Auto Stocks:

In my opinion, demonetization impact will be negative on Auto Stocks especially 2 wheeler. Normally, people pay by cash in small towns and cities. It is also true for entry/mid segment 4 wheeler. The auto sector should expect a slowdown. Not many people are aware that Auto and Luxury goods were one of the key beneficiaries of black money. Though, of late the govt, made it mandatory to quote PAN but still it was not possible to control the cash transactions. Before demonetization, the people knew different methods to cover up these purchases i.e. in some cases vehicle purchase was used to convert black money to white money.

To summarize, there will be a slowdown in the auto sector especially 2 wheeler. I am not expecting these stocks to do well in future.

3. Food and Beverage:

According to my study, it will be one of the hard-hit sectors. The demonetization impact will be negative for food and beverage. To share the demonetization impact, recently i visited a couple of my regular restaurants. You will not believe that some of these are closed temporarily or reduced their timings. The reason being, they are not willing to accept digital payment and willing to forego the business in lieu of cash payment. One of the co-owner told me offline that business is not viable if the share of cash transactions drop significantly.

Therefore, FMCG companies predominantly into food and beverage business may get impacted negatively. On the contrary, listed QSR’s may be benefited because people may shift to QSR’s.

4. Consumer Goods:

In my opinion, consumer goods both electronic and white goods will be negatively impacted. I observed rampant cash transactions and there is also a parallel grey market. Similar to Auto, people with black money preferred cash payments to buy consumer goods. I don’t know the % of such transactions but definitely demonetization impact will be visible on consumer goods.

5. Retail:

The retail sector will hit hard by the demonetization impact. The payments through the retail channel are not tracked. In past i observed people buying gift cards through cash and gifted to their loved ones. There was NO need to quote PAN. Now, such transactions will not be possible with the flushing out of black money from the system. The people will reduce spending. Another reason will be people who lost black money will drastically cut down the spending.

6. Telecom:

I am not a big fan of telecom stocks. For a change, demonetization impact on telecom stocks will be positive. In my opinion, telecom players have done a lot of groundwork on digital payments. Almost all telecom players have mobile wallet offerings for digital payment. The demonetization will help telecom player to increase the uptake of their mobile wallets thus is a positive development for the telecom sector. I am expecting that as the mobile is now personalized device, therefore, uptake of mobile wallet of telecom player might be more compared to independent mobile wallets.

Words of Wisdom:

The economists are predicting a slowdown in economic growth and customer spending. This is because of what i explained in this post i.e. cash spending will reduce. There is a set of customers who are simply allergic to digital payments or spending from white money. The reason being, they don’t want their spending to be tracked. They will prefer not to spend rather pay through digital mode or from accounted income.

In laymen terms, the vanishing of black money from the market will hit some sectors hard. As we don’t have the breakup of cash spending in various sectors, therefore, it is difficult to gauge the exact impact. In my opinion, high-value transactions in cash will hit hard. There was a joke on Facebook “Don’t show off or post a pic of your Hublot watch on Social Media, Income tax department is watching”.

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