Will The Bulls Return?

Following an exasperating two weeks, traders on D-street are puzzling over the market’s near-term future. “You’ve got to keep your cool and focus on the long-term prospects,” says one trader. Another laments, “Well, that’s one part; but how does one really focus on the long term.” In the face of a cash squeeze in the economy, the dilemma is palpable as expectations of high growth in coming years have been well-chronicled. And now, this.

India’s slow and gradual economic recovery seems to have gone for a toss. Stock markets are beginning to feel more than a little woozy. The even bigger worry, though, is not that the stock market has lost 5.96 per cent since then, but how long Indian companies would take to recover from the sudden loss of demand in a cash starved $2.25 trillion economy.

“The coming quarter is likely to be a washout as it’s too early to tell how much demand would be hit, and when or how soon will we see a recovery,” says Nikhil Khandelwal, managing director, Systematic Shares & Stocks. “Stock markets now are not going to be predictable in the near term.”

For one, market watchers are deeply concerned that the next quarter could be a statistical nightmare, and prognosticating about the extent of losses would be difficult. At the same time, market watchers are hoping that the blip in figures is a one-time anomaly and that demand recovers sooner once the cash is replenished in the system.

For now most certainly, the Indian consumption story, which was chugging along beautiful, has gotten off the high roads. Demand for discretionary and non-discretionary items are falling, and some prognostications are downright uninspiring. Ambit Capital in a recent report suggested that Indian GDP growth is expected to slip to 3.5 per cent for FY 17 from an earlier estimate of 6.8 per cent, as the economy is expected to grow just 0.5 per cent in the second half.

Whether or not that happens remains to be seen, but there’s no denying that just when the rural economy was on the verge of a recovery, after a good monsoon, the currency exchange exercise has slammed the brakes on the Indian economy. Businesses are reporting a downturn in sales, with some even reporting a near 70 per cent fall.

Non-banking finance companies were the first to sound out the alarm bells. In a recent concall, Ujjivan Financial Services, a rural focused NBFC, said it deferred repayment schedules and that, if the situation were to prolong, default risks could arise. Auto companies said that bookings are down 30-40 per cent.

FMCG companies are seeing a cut in demand, and are widely expected to report lower consumption. Essential commodities may get spared, but the Indian economy is staring in the face of a painful blow. “It’s like a punch on the face, and you are not sure how long the dizziness will stay,” says Khandelwal.

Now even the better-than-average monsoons can’t play the role of a recovery catalyst. The expectations of a 12-15 per cent earnings recovery has given way to a fall in profits to lower single digits for FY17. Many sectors were crawling out of a slowdown, but now growth appears stalled for another three-six months. Analyst downgrades have just started and it will be a while before a clear picture of the losses can be assessed.

The tricky bit comes when market watchers point to the next few quarters, as analysts are unable to pinpoint whether there will be a cascading effect on secondary activity such as jobs, or growth will kick in soon. Says Khandelwal, “Markets will be negative. We know there is going to be some impact at the primary level; but at a secondary level such as in job growth, no one can draw out the impact just yet. All technical parameters have been broken. You are staring at lower levels, and uncertainty still abounds. The basic fact remains: things are bad at the business level.”

To top it all, foreign investors have been continuously selling much before the demonetization news hit Indian markets. Since early October 2016, foreign investors have pulled out more than Rs 20,783 crore from the market with selling intensifying in November. Domestic investors have matched the sales with purchases equaling Rs 21,092 crore. But that has not sufficed to stem the slide.

Some sectors that are going to be badly bruised in coming weeks and months are real estate, jewellery, autos and consumer discretionary. Real estate might take more than a while to recover because it had one of largest dealings in cash. The Nifty Realty has plunged 24.8 per cent in the last month. But as new bookings for autos and two wheelers have been hit, Nifty Auto has tumbled 12.2 per cent.

But still all is not lost. Demonetisation is moving the underlying strength in the market from consumption in the short run to utilities and traditional banking. Demonetisation is expected to impact NBFCs, though PSU banks are likely to reap the benefits of huge cash inflows. Building materials business would be thwarted whereas the energy and capital-goods sectors can see gains accruing from rising government spending.

Ajay Bodke, CEO and chief portfolio manager, PMS, Prabhudas Liladhar, in a note says: “Consumption discretionary focused sectors such as automobiles, durables, consumer finance, paints and home improvement, and cement would see slow off-take. Consumer staples in FMCG, especially essential goods, would be less struck. Sectors such as pharmaceuticals and IT would be less affected.”

Brokerages are also cutting down their Sensex growth estimates. Ambit had earlier projected the Sensex at 29,500 by March 2017; it has now shrunk its forecast to around 29,000 by March 2018.This means that markets will be flat for most of next year, obviously till the wooziness clears.

So no questions about how will markets actually fare. There is only one answer, and it is this: Brace yourself for more choppiness. A few pockets of resilience may lie in the pharma and IT sectors. Even as valuations have come off, experts warn that this phase may not be easy. With the after-effects of demonetisation still unfolding, the markets are not going to go away in a hurry. For the brave hearts, though, there can be pockets of value in some companies, though one may have to exercise tremendous patience.

Needless to say, whatever solutions are worked out in the near term to resolve the cash crunch situation, the wooziness is not going away in a hurry.

clifford.alvares @businessworld.in