Effect of Demonetization on Asset Class – Good, Bad or Ugly?

Economy 436 views

After the much successful analysis of what demonetization will do to the salaried, it's time we further explore the effect of demonetization on asset class.

The declaration of a sudden ban on Rs. 500 & Rs. 1000 notes on 8th November 2016 by PM Narender Modi has left Indian masses into shock, making them worried about how would they be going to live their normal running life with ease ? Going through with long unbearable and time-consuming long queues and ended up being with fewer denominations such as Rs. 2000 a day, have put a toll on Indian consumers to survive somehow in whatever currency denomination they have. Although it posed many challenges for a lower-middle class society to survive till 31st December 2016 , but our question still cues on what is really going to happen with those investors who have deployed their hard-earned money in asset-class since long?

Also, Read : 26 things related to Demonetization

Effect of demonetization on asset class

Asset class, if we go by the definition means a group of securities or instruments, having identical characteristics and behave similarly in the marketplace subject to laws and regulations. Broadly, speaking asset class classify themselves into three categories – equity or stocks, debt(fixed income) or bonds, money market instruments(including Govt. securities, cash and cash equivalents). Overall, financial advisors classify the asset classes to help investors diversify their portfolio. Although each asset class reflect different risk and return investment characteristics and performs differently in the market environment.  

Let's have a look on the impact of each asset class as a result of Demonetization and on the victory of newly US-elected President Donald Trump:

Equities : The major impact of demonetization seems to put more pressure on Indian equity market more than US Presidential winning effect i.e. Trump's victory. The biggest fall has been witnessed in the Nifty Realty Index, which carries the huge repurcussions of demonetization. The next series of fall has been witnessed in the Nifty FMCG Index, which according to the analysts, can be affected temporarily due to an obstruction in the cash payment systems.

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Nifty Sectoral Indices as on 15th November'16

Nifty Sectoral Indices Percentage (%)-Base Value taken 100
Pharma98.87%
Metal98.80%
IT97.97%
FMCG94.83%
Realty91.15

Source : NSE

The high valuations in the sector have comparatively led to some selling. The IT Index, as we see from the above table have a direct correlation to the Trump effect, leading to really not much decline as observed.

In contrast to other sectors, the metal index has made a foothold, thanks to the analysts prediction that Trump's expenditure on infrastructure will increase the prices of industrial metals.

The next stock which carries a good performance is pharma index, also counted to be a good defensive bet, somewhat in the hope that Trump will be more flexible about pricing.

In short, the more weighing valuation can be seen in Indian equity markets as a result of the demonetization impact.

Gold :  Every hope of Indian finds its shelter under gold avenues, as being the safest asset class since ancient times has grown very much stronger after demonetization effect. Many families have started converting old notes in the exchange with Gold. However, strong vigilance is seen still on the rise on the jewellers, so it remains to be a continual observance on how the gold markets will progress in the long term as 'processing points' for black money.

The major decision taken by the Indian Government, no doubt has created a lot of hustle in the economic market but as we go by industry experts, which suggests gold see a huge demand from the investors side in the times to come. If we observe, gold has already been a hit on a three-year high overnight: from Rs. 30,000, 10 grams gold which floats closed to Rs. 30,147( on 9th November 2016 for 24 Karat-Rs. 10/gm). From the closer perspective of the Indian economy, following describes the gold prices from 8th November 2016 onwards.

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'Closing Price of Gold ' in India for Previous Days in Indian Rupees

DatesClosing Price of Gold (in Rs/10 gm)Closing Price of Gold (in Rs/gm)
8th November 2016Rs. 30,024Rs. 3,002
9th November 2016Rs. 30,147Rs. 3,015
10th November 2016Rs. 29,945Rs. 2,995
11th November 2016Rs. 29,680Rs. 2,968
12th November 2016Rs. 29,396Rs. 2,940
13th November 2016Rs. 29,396Rs. 2,940
14th November 2016Rs. 29,350Rs. 2,935
15th November 2016Rs. 29,328Rs. 2,933

Source : http://www.goldpriceindia.com/gold-price-november-2016.php

Bond :  With the stream of money in the bank, the demand for government bonds and other high rates bonds are likely to be on a rise, leading to a reduction in  bond yields. This can result in increasing the price for old bonds and hence, Long-Term Bond Funds & Tax-Free bonds may have a reason to cheer.

Further rate cuts have also been seen in the debt market, which is a good news for debt investors. With the fall in household inflation, there is a possibility of increasing rate cuts. Analysts expect a 50-75 basis points rate cut in the next 6-9 months.

Top 5 Long-Term Bond Funds & their 1 -year return

Long -Term Bond Funds1-year return 
HDFC High-Interest -Dynamic Fund 15.20%
ICICI Prudential Long Term Plan14.90%
HDFC Income Fund 14.70%
ICICI Prudential Income Fund14.50%
ICICI Prudential Dynamic Bond Fund14.50%

Data Sourced as on 15th November 2016

Top Performing-Tax Free Bonds

Source: https://www.karvyvalue.com/top-tax-free-bonds.aspx


Real Estate : Buyers have an awesome time as they are going to derive benefit from the expected fall in prices of real estate. As we know that the real estate sector is the biggest taker of black money, so undoubtedly it will have a tremendous downfall. The short term scenario can pose serious problems as the number of transactions and prices in residential and land markets may foresee a consequential downward trend. The effect is going to be experienced across the board with tier-2 and tier-3 markets, which will be a larger hit.  

Poor sales resulting in almost flat prices, heavy liquidity constraints, and high leftover inventory– all accompanied have maneuvered real estate sector in realizing its full potential and provide imperative residential stability to average citizens.
The drive of demonetization is possibly seen in dipping of the luxury property prices by as much as 25-30% as sellers face the challenge to sell-off properties to create liquidity. This means that luxury home buyers will have a broader scope in making comparison amongst many properties to choose from.

To Sum up, investors can ease off themselves while considering their investments to get employed in any of the above-chosen asset classes.