Demonetization to bring in short-term pain: Religare Capital

The government’s move to demonetize Rs 500 and Rs 1,000 notes shook the markets today and it will have a short-term impact, according to Religare Capital Markets.

Most investors agree that the move is great step in tackling black money, however, it is likely to induce a short-term pain in the next few quarters, said Gautam Trivedi of Religare Capital Markets. He added that if the government had clubbed the demonetization with Income Declaration Scheme, it would have got more declarations.

The swing factor will be how much of unaccounted money comes into the system from the demonetization, he added.

Commenting on the US presidential elections, Trivedi said that it is too early too early to predict the impact on markets. He, however, said he wouldn’t recommend buying into the market.Below is the verbatim transcript of Gautam Trivedi's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Sonia: What if you made of the events that have unfolded, the market has recovered quite a bit but at this point would you still be a bit cautious or is this time to pump in fresh money?A: The fact is that we have spoken to over 100 investors since this morning both foreign and domestic investors and most of them concur that this is a great move completely selfless and no conflict of interest whatsoever by the prime minister and if anybody could do it, it would be Narendra Modi who could pull off such a massive scheme, but the reality is that I think there will be short term pain for the next few quarters, because the fact of the matter is and this is really the big question people are asking, that of the roughly Rs 17,000 crore of currency under circulation, Rs 2,000 crore is well accounted for because it is Rs 100 denominations and below, but the balance Rs 15,000 crore really is the big question and how much of that will actually translate and result in deposits into the banking system and how much will basically just useless or effectively bonfire.I think that is the big swing factor and in some sense maybe this event or this move by the government or specifically by the prime minister could have been timed along with a voluntary disclosure of income scheme (VDIS), so had they done that I think the VDIS scheme would have been manifold compare to what we eventually ended up netting which is about Rs 65,000 crore - - had the two been clubbed people would have been incentivised to declare more on the VDIS simply because there would be no other alternative or the money basically becomes useless. I think that is something which the government in it wisdom did not do, but I think the writing was on the wall that something major was going to come.Anuj: What is the big call on this market now? Do you get a sense that it’s now absorbed all the bad news and is now ready to move on, especially from the global point of view we have had Brexit and we have had Trump victory? Do you think market is now ready to move on?A: Honestly, it is now too early to comment on that and I know the market had a big rebound from the low of the day, but today we are not recommending buying the market at this point, because there is way too much uncertainty about the absolute cash under circulation and how that is going to impact overall consumption, how it is going to impact real estate, how it is going to impact as a result cement, as a result the loan against property (LAP) portfolio of a lot of NBFC.I think there are too many unanswered questions. There is really no clarity at this point of how big a hit will overall consumption of the economy take and if that indeed happens, of course there are multiple effects of that as well. Deflationary interest rates coming down which will be a longer term positive, but I think earnings and the top line of companies will clearly be impacted and hence I think it’s really early days. We haven’t been able to fully comprehend what the overall impact of this will be, simply because people don’t have a handle on what’s the quantum of money that will eventually not make it back in the banking system and obviously will have to be extinguished, will be useless basically.Sonia: The sector of the day undoubtedly is the pharma space would you buy any pharma stocks now?A: It is a very difficult question it is very stock specific, on one hand you have Dr Reddy’s and Sun Pharma, which clearly are under investigation by the Department of Justice (DOJ), so we don’t have clarity how that is going to pan out, what is going to be the eventual penalty but the fact is, is pharma starting to look attractive the answer is clearly yes, but beyond that I think it is still early days and frankly as I said at the beginning buying into market right now is a very difficult question to answer.