- In this issue:
- » Cashless society is quite an ambitious dream for India
- » Demonetisation to hit Consumer Discretionary Sector
- » Market roundup
- » ...and more!
Two historic events took place last week. Mr Modi declared Rs 500 and Rs 1000 notes illegal and Donald Trump was elected the 45th president of the United States. Both events took the market by surprise. And the market's hatred of uncertainty was evident. On 8 November, the Sensex registered the second biggest single day decline of the year.
The markets have recovered the losses to some extent. But the cycle of greed and fear is not over. So rather than gape at demonetization, the anti-black money crusade, disappointing consumer spending, Trump's reign, Fed rates, hot money outflows, and so on...it's time to make the most of human biases.
So where should one look to invest?
We believe selective and undervalued cyclical businesses could be the answer.
Cyclical businesses are sensitive to business cycles. This leads to uncertainty as far as earnings prospects are concerned. Now markets hate uncertainty. They turn averse to such businesses during the downturn and at times over penalize otherwise good cyclical businesses, offering quite a few bargains.
A word of caution here...
Within the cyclical space, look for companies most likely to benefit from an economic upturn. Stay clear of ones with high debt and vulnerability to a changing regulatory environment.
Our search for such businesses has led us to a company that we are going to recommend tomorrow. We believe the stock is great play on economic recovery. It enjoys high entry barriers but has fallen out of favour during the slowdown in the infra segment. As a dominant player in a niche-but-crucial segment, we believe this company is at an inflection point...but still priced for the slowdown.
The demonetisation drive has led to a double-digit stock price decline, offering further downside protection and turning the risk-reward ratio in investors' favour.
Do watch out for the Hidden Treasure recommendation tomorrow to know more about this opportunity.
02:15 Chart Of The Day
Over last few years, India has seen rising penetration and adoption of digital payments. Apart from cards, net banking and mobile banking transactions are on rise. However, if one compares India's position vs global peers, it lags far behind.
Just 22% of India's transactions Are Non-Cash
According to study conducted by Boston Consulting Group (BCG) in July 2016, the non-cash payments, through modes such as cheques, demand drafts, net-banking and cards, currently account for 22% of all consumer payments in India. However, by 2025 the group projected the number to increase to 59%, as India moves towards digital transactions.
The government's clampdown on black money, and sustained efforts to push digital and electronic payment systems could persuade more people to move to non-cash options. Over and above, the entry of several non-banking institutions offering payment services and solutions too has been gaining grounds. With these developments we may see change in the ratio of cash to non-cash transactions over the next few years.
While the dream of a cashless society seems far, we certainly have taken a long leap in realizing that goal. This will massively change the way people spend. Most importantly, it will lead to a cleaner GDP and financial inclusion of the Indian masses, both great for the economy in the long term.
Post the announcement of the abolishment of high-denomination notes, stocks from the consumer discretionary sectors have taken a sharp plunge. Blue chip companies such as Hero MotoCorp, Maruti Suzuki, TVS Motor Company, Asian Paints and UltraTech have corrected in the range of 5-10% each.
Reportedly, many of these consumer durable companies have cash-and-carry arrangement with their distributors. At the same time these distributors deal with their wholesalers and retailers in cash. The demonetization drive has become a pain point for the trade channels. The disruption in the business channel is likely to weigh heavy on the business prospects in the short term.
Similarly, sizeable transactions in the automobile sector two-wheelers, SUVs and premium vehicles happen in cash. And black money gets heavily invested in SUVs and premium vehicles.
Thus, these sectors will feel the heat and impact on the earnings, at least in the short term. However, readers should focus on the long term fundamentals of the companies. Subscribers can expect recommendations from the StockSelect team, as and when these blue chip stocks offer opportunity to invest. So do keep an eye out for updates from our end.
Indian markets were closed today on account of Gurunanak Jayanti. As far as Asian indices are concerned, at the time of writing, Japan and China stock markets were trading up by 1.7% and 0.5% respectively while Hong Kong and Singapore stock markets were trading lower by around 1% each.
04:50 Investing mantra
"Speculation is most dangerous when it looks easiest." - Warren Buffett
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