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Modi's War Against Black Money: Buy Stocks, Avoid Real Estate

Nov 8, 2016

Tanushree Banerjee, Research analyst

Some are calling it a surgical strike of a different kind.

Still others, an example of Modi 'Trump'ing over one of the biggest roadblocks in India's path to prosperity.

As the hours roll by, we are sure the surprise announcement is going to be called various names. But one thing everyone's going to agree with is the fact that such a move is rare in Indian economic history. It was last taken by the Morarji Desai government when it had demonetised Rs 1,000, Rs 5,000 and Rs 10,000 notes in a bid to counter black money.

Today, in a nationwide address, Prime Minister Modi announced that currency notes of Rs 500 and Rs 1,000 denominations will be illegal starting 12 midnight on November 8. The move is seen as a full frontal attack on the hoarding of black money.

He adds...

  • Corruption and black money is (sic) something we have fought for immediately after assuming office...There is a time when you realise that you have bring some changes in society, and this is our time to feel the same.

Not surprisingly, the announcement was met with widespread shock and confusion as people try to make sense of how it will impact their transactions of all kinds.

And as far as the stock markets are concerned, brace yourself for a volatile ride. Initial feelers seem to suggest that the move is extremely positive for stocks in the long run and therefore, markets should register a strong gap-up opening. However, you never know. Out of sheer uncertainty of how the move will pan out, investors can also run for the exits.

Coming to our view, honestly, we have no idea of what the markets could do tomorrow or the day after. And we don't care.

As far as the long term outlook is concerned, there are two ways the stock markets can benefit. First, from the very improvement in fundamentals this would lead to and second, there's a strong possibility more money moves into stocks as black money investment channels dry up.

But does this mean we should go out and buy every stocks we could lay our hands on? Absolutely not. The principles of stock selection still remain the same; buying fundamentally strong companies, run by a competent management team and available at reasonable valuations.

The only change we see as of now is the fortunes of a few sector as well as companies changing structurally and changing for the better. Exactly which ones would be difficult to comment at the moment. But we do expect a gradual improvement in purchasing power across the board thus leading to buoyancy in stocks related to the consumption story.

We would certainly keep you posted about whether our views on companies and sectors warrant any significant change. So do keep an eye out for updates from our end.

Now, what about real estate, the other important asset class.

The last time real estate prices in India saw a sharp correction was nearly two decades back (1997 to 2003). So almost a generation of Indians has grown up believing that realty price typically move in only one direction.

Scrapping the Rs 500 and Rs 1,000 notes is not just a war on black money. It is a war on real estate prices as well. The asset class has been due for correction for long. But black money, which has been the panacea for the sector, allowed realty companies to revel in the froth. The resulting bubble had a cascading impact on home loans as well.

In fact, our colleague Vivek Kaul, explained in the latest issue of Vivek Kaul Letter how the banks are hand in glove with realty companies to keep the bubble bloating. Bank loans to commercial real estate moved up from Rs 75 billion to nearly a trillion rupees in the past six years.

In our view, the withdrawal of the Rs 500 and Rs 1,000 notes will have the much needed impact real estate prices. This may mean more pain for realty companies and some banks and NBFCs in the near term. However, eventually we expect this move to be a big positive for the economy as a whole.

In conclusion, taking a broad brush, big picture approach, the move to ban 500 and 1000 denomination notes is certainly a move in the right direction. Along with the GST roll out, it will certainly give a big fillip to the India growth story.

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Rahul Shah (Research Analyst).

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7 Responses to "Modi's War Against Black Money: Buy Stocks, Avoid Real Estate"

RAHUL MODY

Nov 14, 2016

MEM, GOOD EVENING, PLEASE SUGGEST ME SOME SOLID SHARES FOR LONG TERM AND SHORT TEARM. I AM A RETIRED PERSON. AND IN MARKET SINCE 1974. RAHUL MODY

Like (1)

SRINIVASAN CHANDRASEKHARAN, BAHRAIN

Nov 13, 2016

Thanks to TANUSHREE for the perfect analysis. She has rightly said that it is right time to invest in Indian equity on fundamentally strong companies, run by a competent management team and available at reasonable valuations. Of course, We, Readers look to her to guide us on the right selection of investment, going forward with the change scenarios, as she does always. Regards


Like (1)

KD

Nov 10, 2016

How much purchasing power will be lost after demonetization? I think, in India there will be deflation, NOT inflation due to very subdued demand. When world is struggling and on the verge of depression. THIS WAS NOT THE RIGHT TIME TO DO THIS.

Like (1)

KD

Nov 9, 2016

I know real estate will crash. GIVE US SOME BREAK!!!!!

What do you think about stocks after Trump presidency?

Like (1)

indusekhar

Nov 9, 2016

right you are....this is public sentiment too....however, political parties would be in woe to fund their moves -- this you have missed......

Like (1)

Abdul

Nov 9, 2016

We the people of India proudly welcome the war on black money by our goverment . But we need another war on abolition of income tax . So , every citizen will show their real or actual income to the government for the development of our country.

Like (2)

Rama

Nov 8, 2016

A valiant act in the war against black money. Not only real estate (correction was long overdue and fully agree with Viveks views on this), the entire bureaucratic chain from the municipal corporations, the govt servants in various depts like water,police, traffic dept, law, electricity, tax, vigilance, food, octroi etc etc will become more efficient (rather less inefficient).. No more the govt servants will own multiple houses in posh loaclities with an honest hardworking person paying thru her nose for owing a simple house and making her child study in a good school. Over a period of time all cash transactions should be curbed. Kudos for the audacious move by the intrepid PM and his team.

Like (1)
  
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