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After opening the day on a very weak note, the Indian share markets have clawed back some losses but continue to trade in the red. Sectoral indices are trading on a negative note with stocks from the realty sector and the consumer durables sector witnessing maximum selling pressure.
The BSE Sensex is trading down 956 points (down 3.5%) and the NSE Nifty is trading down 304 points (down 3.6%). Meanwhile, the BSE Mid Cap index is trading down by 5.2%, while the BSE Small Cap index is trading down 6.2%. The rupee is trading at 66.86 to the US$.
There is a lot of going on in the global economy. First, we have the US presidential elections. People around the globe are keeping tabs of votes and surprisingly Mr Donald Trump is in the lead. The dust will finally settle as the results will be announced within a few hours.
A lot is riding on the outcome of election results. While a victory for Donald Trump could add to global economic uncertainty, the situation wouldn't be any different if Hillary Clinton wins.
If Trump wins, Foreign Institutional Investors (FIIs) may flee from emerging markets to safe haven assets.
Donald Trump's win could deal a big blow to US trade deals with Asia. His stance on trade, immigration and foreign policy is already making markets jittery. While economies like China may suffer the most, Indian exports will not remain untouched.
While the American presidential election has witnessed the rise of two unlikely candidates, they do both agree on one important issue: free trade. More specifically, opposition to free trade, to trade agreements, and opposition to importing goods from lower wage countries. So, if the next US president - Hillary or Donald - determines to restrict trade, the impact could be felt on Indian manufacturing and IT sector jobs. Only time will tell how things will pan out.
That said, there are businesses in India that will continue to do well. And that would create shareholder wealth in the long term when invested in at right levels. So our message to all value investors is this: Focus on the business fundamentals, and use short term corrections due to global economic events to add such businesses to your portfolio.
In fact, we are keeping a close watch and will use any crash opportunity such as above to recommend great businesses that look good but do not allow action due to valuation concerns. Meanwhile, you take care at your end to stay clear of profit killers, irrespective of how tempting the valuations look.
While the global financial markets are trying to gauge the outcome of the US presidential elections, India is busy assimilating Mr Narendra Modi's announcement yesterday. In a nationwide address, Prime Minister Modi announced that currency notes of Rs 500 and Rs 1,000 denominations will be illegal effective from today.
This indeed is a major move to curb black money and the effect of the same will be felt by the people hiding black money with them. When they would suddenly deposit huge chunks of undisclosed income in their bank account or exchange them, the banks will share their details of their Permanent Account Number (PAN) with the Income Tax Authority which in-turn can lead to scrutiny in relation to the source of the income.
We commend the bold decision by Mr Narendra Modi to ban these notes. Despite the overhanging fear of losing vote bank, the government has taken this massive step to curb black money. 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.
Vivek Kaul has written an excellent piece explaining the economic as well as political reasons on why Mr Modi banned the Rs 500 and Rs 1,000 notes.
This decision is positive in the long term for stock markets we believe. People will have to pay taxes on this unaccounted income in order for the money to be useful. Otherwise, the unaccounted money in the form of 500 and 1000 rupee notes will be useless. Once taxes are paid on these unaccounted sums, the money will become legal and a part of it will flow in financial instruments including equities.
So the question is: Should one go out and buy every stock one can lay his hands on?
In our view, the above move should not have any marked change in your investment approach. The principles of stock selection still remain the same: buying fundamentally strong companies, run by a competent management team and available at reasonable valuations.
Meanwhile, we would certainly keep you posted about whether our views on companies and sectors warrant any significant change on the back of the above development. So stay tuned and do keep an eye out for updates from our end.
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