Demonetisation effect: Markets could see a correction, say analysts

Shares of consumption and real estate could come under pressure

The central government’s move to withdraw Rs 500 and Rs 1,000 currency notes from circulation is expected to have a negative impact on the stock markets in Wednesday’s trade. Market players said shares of consumption and realty companies could see selling pressure as their business could take a beating. 

“We could see a sharp correction in consumption and real estate stocks. Also, shares of smaller companies could come under pressure. Most consumption activity in the country happens through cash, which could impact their business. Most of the consumption stocks are trading at high valuations and investors could use this as a selling opportunity,” said Tirthankar Patnaik, India strategist at Mizuho Bank. 

Although real estate stocks are part of the benchmark Sensex and Nifty indices, consumption stocks including ITC and Hindustan Lever have a considerable weightage and their performance could weigh on the market. 

“We should see a negative knee-jerk reaction in the markets. The correction, however, may not last much as the focus will shift to the US election outcome,” said U R Bhat, managing director, Dalton Capital Advisors. “Most listed companies have to submit proper audited accounts so there aren’t much incidence of black money,” he added. 

Global markets are expected to react positively if Democrat Hillary Clinton wins the US elections, while Republican Donald Trump could spark a sell-off in risky assets. 

Not just the market but the move could also make a dent in the real economy in the short term, say analysts. 

“The move will also impact the economy as there could be an immediate dip in growth and consumption number for the third quarter,” said Patnaik. “However, from a medium-term perspective, the move coupled with GST (goods and services tax) implementation will be positive for the India outlook and help improve India’s image in the eyes of overseas investors,” he added. 

The shares of smaller companies, which are used by manipulators to launder black money, could also be in spotlight on Wednesday’s trade. 

“It is a very powerful measure to curb black money. It will have deflationary impact in general and on real estate prices in particular. It could make homes affordable and is indirectly a boon to honest tax payers,” said Nirmal Jain, chairman, IIFL.