100 days of note ban: Markets recover lost ground, foreign outflows stem

Strong domestic buying and positive earnings in Q3 help market stabilise

It’s been 100 days since demonetisation and the stock markets have emerged largely unscathed. The benchmark Sensex and Nifty and the broad-based BSE 500 indices are all currently three per cent above their November 8, 2016, close, when the government decided to recall the old Rs 500 and Rs 1,000 notes, which comprised 86 per cent of the currency in circulation. 

These indices had tumbled between six and 10 per cent after demonetisation amid Donald Trump’s surprise victory in the US presidential elections, triggering a flight of capital from markets like India. Even the rupee, which was seen nearing 69 against the dollar amid a sharp $10-billion capital outflow from the domestic market, is now at 67, almost close to its November 8 level. Stocks in real estate, fast-moving consumer goods, automobile and non-banking finance companies (NBFC) were among the worst-hit, tumbling anywhere between 20 per cent and 40 per cent on fears that the cash crunch would hurt demand. Most of the shares in the space have substantially recovered lost ground.  The sharp rebound in the stock markets has taken many by surprise. Analysts say three factors — the stemming of capital outflows, positive earnings surprise in the December quarter and strong buying support from domestic investors — are the reasons for the V-shaped market recovery.

On the global front, the declining US dollar against major currencies has improved the risk appetite and stemmed, if not reversed, the capital outflows from emerging markets such as India.

In November and December, nearly $10 billion had moved out of the Indian debt and equity markets. Since January around $1 billion of it has come back as the dollar has depreciated two per cent against the rupee. Notably, buying by mutual funds (MFs) has been another important factor in market stability. In fact, fund managers were seen stepping up their buying after demonetisation as stocks were headed southwards. Robust MF investments of nearly Rs 27,000 crore since November 8 have proved to be a counter-force to foreign institutional investor outflows and one of the main reasons for market stability.

Another crucial factor in the market rebound, say experts, is the positive earnings surprise in the December quarter. The Street was expecting corporate earnings to suffer due to demonetisation. However, most companies surprised by surpassing analysts’ expectations.

 “The impact of demonetisation is clearly visible in consumer stocks such as staples and discretionary consumption in terms of weaker volumes but the silver lining is that it is not worse than expected,” says Ravi Muthukrishnan, co-head of research at 

ICICI Securities. “Retail finance-focused private sector banks have seen very little impact of demonetisation. The December quarter results for Nifty stocks declared so far indicate neutral results versus expectations.”

NBFCs, in particular, have seen a sharp rebound in their stock prices. Stocks like Manappuram Finance and Bharat Financial Inclusion, which had corrected more than 40 per cent, have rallied 60 per cent each from their December 2016 lows. Similarly, blue-chip stocks such as UltraTech Cement, Ambuja Cement and Asian Paints too have seen a sharp recovery in their stock prices.

After demonetisation, analysts were quick to cut the December 2016 and March 2017 quarter earnings estimates for most companies. Consensus earnings per share estimates for Nifty companies were cut by four per cent for 2016-17 and around two per cent for 2017-18. However, analysts say they feared the worst in the December quarter and hence, have been positively surprised.

According to ICICI Securities, of the 28 Nifty companies that have declared their December quarter results, 13 companies’ earnings have been in line with expectations — seven having surpassed them and eight missing the same.