The past week proved to be a good demonstration of the futility of trading on the big market events. You prepare, debate and hedge against one mega-event. But another unexpected one comes hurtling out of nowhere to knock you cold.

So, after much nail-chewing about the US elections, its impact on sectors and what-if scenario building in the last month, US election results finally brought an unexpected twist.

Change of heart

The week started with the elections throwing up a ‘negative’ surprise, as analysts like to say. Donald Trump made a clean sweep, not only of the White House but also of the Senate and House of Representatives.

On Day One after this event, markets reacted as expected. US stocks were quiet, Asian currencies and markets tumbled in a bloodbath and gold prices surged on safe-haven demand.

But this proved pretty short-lived as Trump’s acceptance speech brought about a miraculous and inexplicable change of heart in market participants. The lack of a hard-line stance in his speech had US stocks promptly reversing as they discovered all sorts of silver linings in Trump as President. http://www.wsj.com/articles/markets-rise-as- investors-begin- buying-in- to-trump- 1478766871

So, financial stocks jumped on expectations that the Dodd Frank Act would be watered down, pharma stocks partied on a relief rally (Clinton had promised to drive a hard bargain on the pricing of US generics) and industrials were up on hopes of a Keynesian spending boost to the US economy. As the Dollar Index also rose in sympathy, the rout was confined to bond markets, where bets for a Fed rate hike climbed further.

As this column was being written, the Dow Jones Industrial Average had put on a cool 5 per cent over a week and was at a new life high after digesting the so-called negative surprise.

Emerging markets continued to face pain though, with fears of foreign investor withdrawals looming large. http://www.bloomberg.com/news/articles/2016-11-10/asian-equity- outlook-diverges-after-post-vote-rebound-yen-slump

Demonetisation hit

Indian markets tried hard to keep up with this kaleidoscope of changing emotions in the global market, but gave up the fight towards the end of the week. By Friday, the focus was wholly on the impact of the thunderbolt that Prime Minister Modi unleashed on November 8.

Economists and CEOs at India Inc heartily welcomed the invalidation of Rs 500/1000 rupee notes, as a landmark move that would sink the parallel economy, improve India’s tax base and unleash many structural benefits for the tax collections and fiscal deficit numbers over the long-term.

But it was left to market participants to digest the disruptive short term impact of this move on different sectors.

Predictably, with fears that this crackdown on black money would bring a good number of real estate transactions to a grinding halt and make the going tougher for an already ailing sector, it was realty stocks that took the biggest blows from this move. https://www.thehindu.com/business/Industry/demonetisation-of- rupee-notes-realty-prices-may-crash-up- to-30/article9325193.ece

Who won, who lost

The S&P BSE Realty Index lost 11.8 per cent over the week. Stocks such as Oberoi Realty and Kolte Patil were among the big mid-cap losers, with 16 per cent shaved off. Cement and steel stocks suffered collateral damage on concerns that a sluggish real estate sector would hit volume growth - per estimates, about 60 to 65 per cent of cement consumption and 30-35 per cent of steel consumption goes into construction and real estate.

On the belief that purchases made with hard cash are quite prevalent in this sector, makers of construction materials and home improvement products took punishment too. So Kajaria Ceramics lost 15 per cent over the week, while Cera Sanitaryware saw an 18 per cent decline.

Despite re-assurances that primary sales would not take a big blow from this move, housing finance stocks did correct sharply. While market leader HDFC got away with a 9 per cent cut, Dewan Housing fell over 15 per cent.

The entire basket of consumer stocks which have been over-active in recent months on Pay Commission and festival season hype, took this opportunity to correct too. Worries that cash purchases of consumer appliances and vehicles, particularly in rural India, would take a hit due to the disappearance of high-denomination notes dampened the stocks.

The BSE Consumer Durables Index tumbled 5.4 per cent over a week. The S&P BSE Auto Index lost a milder 2.1 per cent. The BSE FMCG index held up relatively better, still gaining 1.4 per cent for the week. Though the demonetisation move sparked an immediate rush to the jewellery stores, the concerted drive against black money and insistence on PAN cards was seen as long-term negatives for jewellery players, sinking stocks such as Titan and PC Jewellers. https://www.thehindubusinessline.com/economy/crackdown-on-black-money-to-impact-gold- demand/article9328674.ece

Much fancied microfinance NBFCs and gold lending companies were out of favour too, with the cash crunch seen to affect their lending and recovery operations for a while.

Bank rebound

One sector about which market players seemed wildly bullish though, were PSU banks which gained throughout the week, before pausing for breath on Friday. Several factors combined to lift sentiment towards this pack. Battered PSU bank names such as Indian Bank, Vijaya Bank, PNB, BOI were big gainers putting on over 18-20 per cent in just a week.

The bullish triggers were threefold. One, PNB’s results offered hope to markets that the worst is over on the NPA slippages front (SBI results on Friday didn’t reinforce that though). Two, demonetisation was seen to give a short term boost to the CASA balances of banks (with unlimited deposits and capped withdrawals for over a month) reducing their cost of funds and helping margins.

Three, the sudden crackdown on cash transactions was seen to push more customers to go cashless, apply for credit/debit cards and move into the formal banking system, paving the way for easy customer acquisition by banks.

While all this seems short term, one big game-changer for PSU banks could come from a big boost to RBI’s reserves and possibly the Government’s revenues from the cancellation of old notes, post-demonetisation. https://www.thehindubusinessline.com/economy/macro-economy/will- the-govt- move-reduce-fiscal- deficit/article9325088.ece

With a view circulating that old currency notes that don’t get deposited could get extinguished and give RBI’s reserves a Rs 2-2.5 lakh crore lift, there finally seems to be light at the end of the tunnel on the bank recapitalisation problem. But one needs to wait and watch how this story unfolds.

Overall though, this week has provided a healthy opportunity for the over-valued Indian equities to correct and for the long-awaited sector rotation in the markets to take shape. For too long, markets have chased sectors such as consumer, NBFCs and cement for their earnings ‘visibility’ while beating down PSU banks and industrials. It is good to see the underdogs make a comeback.

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