When the storm hits, it's better to stay put rather than indulge in any heroics. The two major events that unexpectedly hit the market - demonetisation of Rs 500 and Rs 1,000 currency notes, and Donald Trump winning the US presidential election - will take time for the market to digest. While Trump's victory to certain extent has been discounted by the market and the BSE Sensex bounced back towards day-end today from a 1,690-point fall to end lower by 339 points at 27,252.53, the market has still not seen a complete impact of the demonetisation.
Demonetisation is a local issue and has got hidden and ignored by the market, but it's eventually going to play out in the days and weeks to come. While some figures point out that 25 per cent of the economy is grey market driven (unofficially it's said both main and grey economy run parallel, but no official figures to support it), that money ultimately comes in as support to the main economy. If the grey economy disappears, it's going to have its own ramifications and disrupt entire ecosystems.
In the past few years, consumption theme has been the biggest saving grace for the Indian economy and demonetisation will certainly impact consumption, particularly discretionary consumption. The other huge impact of demonetisation will be on the real estate sector, which deals with cash. It will also impact the financial sector as there is expected to be a rise in NPAs following default from the real estate players.
On the positive side, the banking sector will benefit due to the idle money (legal currency kept at home) moving into the financial system, for instance, housewives who keep cash in hand for a rainy day will all come into the system and to a large extent capitalise the banking system, improving their CASA without the government putting in idle cash.
With valuations being expensive, a correction that looks likely in the coming days may give opportunity to investors to pick good companies. The best way would be to come through the mutual fund route and preferably through systematic investment plan (SIP).
Meanwhile, gold is attracting huge interest. As per market grapevine, traders in certain pockets in Mumbai have converted their black money into gold by paying a premium to the market price. The gold prices gained more than 2 per cent in a day.
Demonetisation is certainty good in the long run, but in the immediate near future it will be a bigger issue than Trump being the 45th president of the US, considering his views around protecting the domestic industries in US and reducing offshoring of jobs; as also on clamping down on immigration. It will be interesting to see how he acts as a president as compared to a presidential candidate. A country's policy doesn't change overnight.
While things will take clear shape in the coming few weeks, one thing is clear, markets never like uncertainty and some amount of knee-jerk reaction is still awaiting the Indian equity market.