Nifty Rattled By Around 2.50% Amid Rising US Bond Yields And Fear Of Slowing Demand & Economic Activity Because Of Govt’s ‘Surgical Strike On Black Money”—What’s Next ?

Market Wrap: 11/11/2016 (16:45)

Nifty Fut (Nov) today closed around 8335 (-217 points) in a  “Black Friday” style after making a day high of 8475 in the opening minutes and session low of 8316 and finished the week around 1.50% lower marked by US Election drama and NAMO’s sudden “Surgical Strike” on the “Black Money” (Demonetization effort).

Indian market today opened significantly lower amid carnage of EM currencies despite overnight rally in US stock Futs as Trump’s aggressive fiscal stimulus plan coupled with proposed cut in taxes may accelerate growth, but may also cause significant fiscal deficit and runaway inflation,. This may prompt Fed for a more rapid rate hikes in the months ahead apart from the planned Dec’16  and thus the US TSY Bonds and also the USD was spiked making EM currencies extremely vulnerable for out-flow concern and interest rate differentials.

Thus all Asian & other EM markets were in red in the early Asian session except Japan, which shows some stability/strength amid declining Yen. Strength of USD was visible across the major pairs except GBP as the market may be assuming a “Soft Brexit” rather than a “hard” one for UK, contrary to the earlier perception. 

Apart from the recent UK HC verdict on the requirement of Parliament approval for the “official divorce process”, which will be challenged in the SC there and subsequent delay in the overall Brexit process, another factor may be that because of Trump’s election as US President, he may overrule the earlier notion of Obama admin not to negotiate a bi-lateral trade deal between UK & US in the event of a “Real Brexit”. Moreover, because of unique nature of Trump (anti establishment & practical), he may also force EU for a “Soft Brexit” in exchange for a “threat” of cooling trade & military ties between US & EU.

Although, the US market is still in the grasp of “Trump Rally” because of the fiscal stimulus talks, it’s may be eventually turned into a simple election rhetoric (jawboning), until Trump actually divulge some specific plan, presumably after taking official charge in Mid-January’17. 

But until then, US market as well as the EM (s) may dance to the tune of “Trump” and we may even hear something similar fiscal stimulus package from the other major G-2 economies (ECB/BOJ), where growth & inflation is practically nowhere despite decades of QQE (monetary stimulus). 

All these notions may force the EM outflows more rapid in the coming days and made currencies more vulnerable. Among these, Chinese Yuan may matter most for the global financial market and any jitters there may also cause significant melt down on the “risk on” trade.

Although, Indian Rupee is relatively more stable because of better macros, it may devalue also towards 70 areas in the coming days simply because of interest rate & bond yield differentials & outflows (USDINR).

Indian market today showed more weakness than its global peers as the ongoing Demonetization effort of the Govt may cause further crippling of consumer demands and slowing economic activity, which in turn may also affect the GDP growth of 7-8% of the country. 

Thus the present “war” on “black/unaccounted money” may also cripple the consumption story of India, despite the Govt’s intention may be right and the country may loose the tag of the “fastest growing economy” in the World by the next couple of years.

As par some market buzz, in the last few days after this Demonetization announced by the Govt, sales of consumer durables & autos has plummeted (HOS: 25% drop in 4W, 65% drop in 2W and 95% drop in CV sales---unconfirmed report). There is also report of abnormal overnight crash in real estate prices in different key parts of the country and very few official registrations of the same also.

If the above report is correct, then the overall trend might be more painful and it may exist for the next couple of years at least, against present expectation of couple of months by the Govt and in that scenario we may have more pain for the economy and the market. 

The current form of Demonetization may also destruct the "hidden" wealth or simply convert it into another form of hard idle assets or could be just flow out of the country rather than going into the main economy because of fear of prosecution, fines, harassment, and “dignity” of big names. All these, in turn may suppress the domestic demand and thereby the much expected revival of corporate earnings also and the overall story of Indian consumption may also take a back seat.

Also,the timing of this Demonetization and the US Election outcome uncertainty was not perfect and together has caused significant market meltdown in India. 

Another factor was that, Govt is hinting to defer the roll out of GST from April’17 to Sep’17 and the current political & public chaos because of this Demonetization may also force the Govt to go slow in other forms of reforms & the implementation of the GST also.

The overall public reaction because of this sudden Demonetization & subsequent harassment of common people having little amount of cash in hand (household savings) in high denominations may have also dented the approval rate of NAMO/BJP and the forthcoming state elections, especially the UP may be a tough challenge for the NDA. 

Because, of this sudden Demonetization, new political equation may also emerge in the national politics and the Gov may also find it hard to pass the final GST bill in the coming Winter Parliament session later this month.  

Today’s SBI result may also show that NPA woes in the Indian Banking system is not over and that may also accelerate more after the clamp down on the “Black Money” as practically, India may still be an economy of “unaccounted money”, even it sounds quite bitter. We may also see some “stress” in the retail assets (NPA/NPL) for the banks in the months ahead as the “unaccounted money” may be the main source of retail/HNI “hidden wealth” and subsequent bank funding or other form of financial investments in India.

Valuation wise, at 375-405 current/expected EPS with a fair historical average PE of 18, Nifty may be quoted around 6750-7300 in the months ahead in the above scenario of EM fund outflow concern and India's "war on black money".

Technically, consecutive closing below 8365 (200 dema), we may term it as the beginning of a “bear market” and in that scenario; NF may further fall towards 8265-8185 & 8040-7900 area in the coming week (further bear case scenario)

For any strength, NF need to sustain above 8425 area for further “dead cat bounce” (?) towards 8485-8545 & 8650-8705 zone for the next week (slight bullish case scenario).

Present downwards trend of NF may change by only consecutive closing over 8850 zone in the near term; otherwise expect deeper correction below 7900 and in that scenario, NF may even fall towards 7500-7100 & 6800-6600 area by FY-17/18.

 SGX NF