Markets since demonetisation, in three charts
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Mumbai: A year from the surprise announcement of demonetisation of high-denomination currency on 8 November last year, benchmark equity index Sensex has gained more than 21%, after falling initially as lack of enough cash in the system hit consumption.
With earnings recovery not in sight, partly because of the rollout of the goods and services tax (GST) in July, the note ban further led to speed breakers for economic and corporate earnings recovery in Asia’s third-largest economy.
On the brighter side, demonetisation triggered more inflows into equity mutual funds, driving up the market. That said, with earnings growth not catching up, valuations have become very stretched.
Performance of sectoral indices since demonetisation
All the sectoral indices, with the exception of BSE Healthcare index, posted gains since then. While consumption took a hit, strong liquidity and an intact long-term growth story, propelled consumption-focused stocks higher too.
BSE Consumer Durables index was the top gainer among sectoral indices since demonetisation, as it logged 58.90% gains since then. This compared to 21.34% gains posted by the Sensex in the same period. BSE Realty followed next with a 78.31% gain, on the back of thrust on affordable housing by the government.
Demonetisation hit the Indian economy unexpectedly at a time when it was eagerly awaiting a revival in consumption demand.
The much-anticipated earnings recovery, on the back of a decent monsoon after two years of drought-like situation and implementation of the recommendations of the Seventh Pay Commission that left more money in the hands of the people, was pushed further.
However, a liquidity-driven rally, specifically backed by strong flows into mutual funds schemes, coupled with lagging earnings growth have driven up valuations to the expensive zone.
On 4 November, Sensex traded at 22.07 times fiscal year 2018 price to earnings, the highest in the current year so far.
Surge in inflows in equities
On the brighter side, demonetisation triggered more inflows into equity mutual funds, driving up the market.
Data from the BSE showed that domestic institutional investors pumped in a net of Rs95,962.97 crore in Indian shares since demonetisation to date.
Since demonetisation, flows into mutual funds have been very strong, especially in equity and balanced funds. From November 2016 to October 2017, equity funds have received inflows of Rs1.35 trillion and balanced funds have received Rs74,000 crore, Morningstar said, pointing that this represents a huge jump in the flows received in these categories a year prior to demonetisation.
To be sure, falling bank deposit rates also helped the surge in inflows in mutual fund schemes.
Another trend was the increasing participation from retail investors, as greater proportion of savings are seen getting deployed into financial assets.
Individual investors accounted for 48.5% of the overall assets in September 2017, compared with 45.4% in October 2016.