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Negative impact of demonetization is now visible in the economy as the recent PMI (Purchasing Managers Index) figures shows. PMI dropped from 54.5 to 46.7 in November. It has registered in contraction territory (below 50) for the first time since June 2015 and pointed to the sharpest reduction in output for almost three years.
There is a major decline in three sub-sectors, namely Financial Intermediation, Hotels & Restaurants and Renting & Business Activities due to cash shortage. New business declined for the first time since June 2015, leading to a solid reduction in activity. In spite of the falls in output and new orders, optimism regarding future activity improved. Input costs were broadly unchanged, whereas prices charged decreased slightly.
This fall in PMI will affect the overall GDP growth. The November manufacturing figures of companies are generally positive but that could be due to cash parked in light of demonetization.
Similar to Britain’s exit vote, Italy would be undergoing a referendum on Sunday, 4th Dec. The vote is to decide whether the government should undertake reforms or not. Italy’s prime minister has offered to resign if the voters go for ‘No’ vote. The risk is that in that case the other parties and PM candidates are strongly in favor of exiting from euro zone. Even bigger risk is that it may then lead to more exits and ultimately breakup of euro zone and euro currency.
It will be a major long term disaster for global economy and geo-political stability.
Polls as well as the general public sentiments in Italy are indicating clear lead of ‘No’ voters – and it is also being reflected in European markets today.
A negative vote will immediately impact markets globally, including Indian markets. Markets had recovered to near 8300 as expected by us where we had recommended shifting from equity to debt. A negative vote may cause Nifty to test 7900 – 8000 level again. Next major support below 8000 is 7750.
Markets are not cheap, Nifty is near a PE of 22 while its average PE normally remains around 18. The current corporate results were also not encouraging and looking at the short term negative impact of demonetization, the markets are overvalued. Current rally in markets may be a short covering rally as Nifty had fallen sharply to near 7900.
Long term investors should consider it as another opportunity to exit from equities and we recommend them to switch to balanced funds.
Recent unexpected CRR hike by RBI has made it difficult to make any judgment on its policy and we now suggest debt investors not to take any decision expecting a rate cut.
NSE – INB 231219636, INF 231219636 BSE – INB 011219632, NCDEX Membership No: 00635 | MCX Membership No: 28850 | SEBI Registration No: MCX-SX: INE261219636 SEBI Registration No: NSE Currency: INE231219636