Demonetization a bold move, but could hurt markets for 6 months: Christopher Wood

CLSA MD Christopher Wood on Narendra Modi’s demonetization move against black money and impact on markets

CLSA MD Christopher Wood rates the Narendra Modi government an 8 on 10 on reforms delivery. Photo: Ramesh Pathania/Mint
CLSA MD Christopher Wood rates the Narendra Modi government an 8 on 10 on reforms delivery. Photo: Ramesh Pathania/Mint

Gurgaon: The government’s move to withdraw high-denomination bank notes to curb black money is a bold one, and even though it is a long-term positive, it can hurt equity markets for around six months, Christopher Wood, chief equity strategist and managing director of CLSA, said in an interview. He rates the Narendra Modi government an 8 on 10 on reforms delivery. Edited excerpts:

How do you perceive the government’s demonetization move?

It is a dramatic and remarkable move. Normally, such a measure will happen in a country in the middle of a macroeconomic crisis and facing a hyperinflationary problem. But India is not facing such a crisis.

Do you think this is the first in a series of moves to tackle the larger problem of black money?

I would like to see this as part and parcel of the move to accelerate digital banking. That is the key structural thing. You had the drive to get everybody a bank account. The UIDAI programme has also has been continued. There is also the political angle of state elections next year.

What are the negative implications?

I think it is going to impact the economy in the next six months. But I am hoping it is short and sharp. The biggest negative is for the real estate market. It is negative for equities in the short term and positive for bonds.

The question is how long will the pain remain (for equity markets)—six months or one year? I am hoping it’s six months, but that’s just an initial estimate. It all depends on how quickly they get the new money in place. If the new money comes in soon, things will not be so bad. If it goes beyond six months, the markets will be vulnerable.

The real estate sector was already doing badly, that’s hit, but then it was already lying on the ground. Autos, cement and housing finance were doing well, and are now going to be hit.

On the positive side, tax revenues will rise and this will help in reining in the fiscal deficit. The other benefit will be to the bond market and currency. The currency has been very stable and this will be a positive for it.

How do you think the government’s move will impact the chances of the ruling Bharatiya Janata Party in the state elections next year?

It is a very bold move by the government because it could backfire. It is very risky. (With) any such move, you cannot be 100% sure if the practical implementation will work. How long it will take to deal with the inevitable teething issues.

The Modi government will complete two-and-a-half years later this month. How do you assess its time in office?

There have been dramatic reforms, but the big missing link has been that we have not had the big capitalization of state-run banks. It is still a work in progress.

There has been a lot of pressure on banks to own up to the bad loans and there has been a lot of red ink reported. So, that is progress. I have been hoping that you will see consolidation of public sector banks. The setting up of the banking bureau is also a positive. But because the big recapitalization is missing, it is delaying economic recovery.

But otherwise, demonetization is one of the biggest reforms. GST (goods and services tax) is in the works, bankruptcy is also a positive in the long term, but it will take many years. The law for regulating the property market is important.

How will you rate the government on reforms?

I will give the government an 8 out of 10.

Is India still an attractive investment destination?

India is still a very attractive destination on a long-term basis. It is not the best market in the next three months. The key thing to watch out will be how deep and how long the economic fallout from this attack on cash will last.

Will this move impact corporate earnings as well?

The market was expecting corporate earnings to pick up, but that is being delayed now. I am hoping that it is not more than six months. If it does not resolve within that time, then the market is very vulnerable.

What do you make of Donald Trump’s victory?

It does not mean anything for India, as it is more dependent on the domestic story. The impact on the other emerging markets so far is that the US bond market is sold off, and that has led to pressure on emerging market debt, which is selling off. People made a lot of money in emerging market bonds this year, and are now rushing to sell. However, the Indian debt market is not the worst-hit. Indian equities, right now, are completely driven by the domestic development of demonetization.

Investment demand has not picked up in India. When do you think that will pick up?

In terms of investment cycle, there are three areas that can get it up. The first is government-driven infrastructure, which is happening; capital expenditure, which is still low; and the third one is real estate, which has taken a hit. So, the investment cycle is not going to recover anytime soon.

A lot of IPOs with unique propositions hit the market this year. What are your thoughts on the same?

The more important asset class that is emerging in India is stressed debt. To me, that is more interesting than the IPOs. That’s a sign that the banking system is beginning to get cleaned up.

We had a change of guard at the Reserve Bank of India. Your views?

Monetary policy is easier under Urjit Patel, but I am hoping that the pressure on the banks to clean up their books is maintained.

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