Stock market outlook downgraded as bank notes ban hits economy

Sensex is expected to rise next year but it may not scale record highs predicted a few months back, a Reuters Poll showed, mainly because Prime Minister Narendra Modi’s shock currency ban is seen knocking economic growth in the next few quarters.

Even if the real pain from Prime Minister Narendra Modi's currency ban is short-lived, it will have a big negative impact on corporate earnings.
Even if the real pain from Prime Minister Narendra Modi’s currency ban is short-lived, it will have a big negative impact on corporate earnings.

Indian shares fell over 6 percent a day after the Nov. 8 announcement by Modi outlawing high-value bank notes, coinciding with a shakeout in global financial markets after Donald Trump’s victory in the U.S. presidential election.

“What demonetization did from an equities perspective is it added to an already lengthy list of risks, such as a impending Fed rate hike, Trump’s win, corporate earnings slowdown and investor flight to higher-yielding assets,” said CA Rudramurthy, managing director at Vachana Investments.

While there are concerns Modi’s demonetization drive, aimed at curbing corruption and tax evasion, will put the brakes on the economy, a more immediate risk is its impact on foreign investors who have already begun moving out of the country.

In November alone, foreign investors sold nearly $3 billion worth of Indian stocks – a trend that could extend in a milder form until a sufficient amount of cash seeps through the economy and rekindles consumer demand, analysts said.

Still, the median consensus in the poll of nearly 50 equity strategists and brokers taken over the past week found the BSE Sensex would rise nearly a percent to 26,650 points by the end of December from Tuesday’s close of 26392.76.

By mid-2017, it is forecast to reach 28,500 and then to 29,600 by the end of next year.

That is significantly lower than the 32,000 points analysts predicted for end-2017 in an October poll, which would be a new record.

Expectations for the broader NSE index were similarly downgraded, and it will now likely end this year at 8,250 from Tuesday’s close of 8143.15. By June 2017, it is expected to rise further to 8,775.

“Even if the real pain from Modi’s currency ban is short-lived, it will have a big negative impact on corporate earnings, in my view, which doesn’t bode well for foreign institutional inflows,” Rudramurthy further added.

A significant minority of respondents said the after-effects of demonetization were a bigger threat to Indian stocks over the coming year than the prospect of faster rate hikes from the U.S. Federal Reserve or Trump’s protectionist policies.

A majority of analysts who answered a separate question said the effects of removing the currency in circulation would be short-lived on the equity markets and don’t expect the stock market to fall any further over the coming year.

The crackdown on the 500 and 1000 rupee bank notes, which removed 86 percent of the currency in circulation virtually overnight, has severely hurt consumption besides leaving many companies’ cash-reliant supply chains in tatters.

India’s central bank is likely to cut its benchmark lending rate by 25 basis points to 6.00 percent later on Wednesday, according to the latest Reuters poll, in an attempt to stabilise the economy.

A separate Reuters poll last week showed the Indian rupee’s recent slide has mostly run its course and it will likely weaken to 69.2 a dollar in a year, from 67.75 now.