Positive impact on FY18 earnings from demonetisation: Vikas Khemani, Edelweiss Securities

It has been an eventful fortnight for the equity markets that have been surprised by the outcome of the US presidential elections and the government’s demonetisation move back home. VIKAS KHEMANI, president and chief executive officer at Edelweiss Securities, tells Puneet Wadhwa that the demonetisation move should strengthen retail investors’ belief in Indian equities, as long as it brings growth, reduces inflation and interest rates. He believes that while India cannot remain unaffected from global events, it remains one of the best investment stories around the globe. Edited excerpts:

November has been tumultuous for global financial markets. Is there more pain in store?

The new regime in the US brings in a lot of uncertainties with regards to US policies in the context of markets – fiscal, monetary and global trade. The game is likely to change from a tight fiscal policy and loose monetary policy to loose fiscal and tighter monetary policy. In that sense, there are expectations of growth upgrades in the US economy, and also rise in inflation. This could mean a relatively aggressive tightening by the US Federal Reserve (US Fed). This transitionary phase will keep uncertainties in the emerging markets (EMs) very high, and hence high volatility. 

How does India appear as an investment destination now given the global developments and the demonetisation by the government? 

India undoubtedly remains one of the best investment stories around the globe. Since India is less dependent on exports, and the two other pillars of consumption and investment remain strong, it is less likely to get impacted from EM outflows and volatility. However, it cannot remain unaffected. Demonetisation is a very bold and positive move to bring black economy into mainstream economy. This move, coupled with the implementation of the goods and services tax (GST), could set India on a very different path.

Do you see a flight of capital from EMs, including India?

FIIs are very positive on the India story. However, since India is a part of EM funds, if they face any outflow from their EM funds due to global developments, India will also see an impact. One should not confuse market performance due to global events to demonetisation. 

How are retail investors reacting to this development? 

Retail investors are struggling to deal more with short-term inconvenience. These developments are unexpected and unprecedented, the initial reaction has been one of panic and confusion. I guess things are stabilising now. This move should only strengthen their belief in Indian equities, as long as it brings growth in the long-term, reduces inflation and interest rates.

What’s the likely impact of the move on the GDP growth? 

The next two quarters would certainly see growth numbers slow down, although the extent of the damage is difficult to assess. Of course, much would depend on government response and how much and how soon money comes back into the system. Any negative impact should be seen as temporary and will come back with a multiplier.

Do you foresee a setback to a pick-up in corporate earnings as a result of the demonetisation move?

I foresee a cut in FY17 earnings in discretionary consumption-oriented sectors. Banking would be positive since so much money has come into the system. Investment-led sectors would remain unaffected. I do not see FY18 numbers being significantly derailed because of demonetisation. In fact, it can create positive impact on FY18 earnings. 

Is the consumption story in India likely to come to a halt ?

Consumption, especially discretionary, will be hit over the next three to six months, but will come back as cash is replenished, government spending increases, and interest rates fall. Real estate prices may come down by 15-20 per cent, especially in areas where cash involvement is high. However, this will be temporary and the move is very good for economy and consumers.

Metal stocks have done well in the backdrop of rising commodity prices. How long will the good times last? What about banks?

The key call for commodities is the dollar trend and also China’s economic growth momentum. At this stage, I will not be surprised if metals correct given the dollar  is seeing a rally and US rates are headed higher. However, if the US starts spending on infrastructure building, it is good for 
commodities in the long run. Banks are a very structural India story, and we remain positive on them.

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