Tomorrow Never Dies.

     Murphy’s Law states that anything that can go wrong will go wrong. In India’s case, more often than not, Murphy’s Law does seem to ring true. And worryingly, it seems to be happening on quite a regular occasion in these times. No sooner than one crisis is seen off and the dust settled and the Indian markets ready themselves to resume on the path to growth, does another one rear its ugly head. Simply put, the long awaited Indian Bull Run may be quite some time away.

     In the world of the bourses, the rear view mirror is always clearer than the windscreen. And while the markets have inched up and generated mediocre returns over the past few years, valuations have simply taken off and run far ahead of fundamentals. Needless to say, until the fundamentals do catch up and justify the valuations, a Bull Run won’t materialize anytime soon. 

     As the past has shown, whenever the markets seem ready to blast off, a black swan event hits and throws them off course. When the markets recovered after the crash of 2008 and a UPA Government was elected, everything seemed in place until the Eurozone crisis hit. Soon after the risks of a Eurozone collapse began receding, the US Federal Reserve began hinting at the tapering of Quantitiave Easing III, its bond repurchase programme, which sent the Rupee crashing. India subsequently witnessed two poor monsoons and then in in 2015, the China slowdown was enough to shake the markets to their core. And just when oil declined to a level that promised new growth for most sectors, the US Fed stepped in and began hiking interest rates, which strengthened the Dollar and accelerated the rerouting of funds to the USA. Oil soon began a reversal and followed it up with a steep climb. The year 2016 witnessed two shockers in the Brexit and the Trump election. Every time, just when it seemed that the markets would finally pick up, a new obstacle materialized and kicked the can of growth further down the road. 

     With the Sensex trading at around 20 times earnings, its valuation has risen but earnings have been lacklustre at best. While subdued crude prices seemed to be the perfect catalyst for fuelling the fresh shoots of growth, the rise in oil prices has laid that plan to rest. With lowered interest rates and a stable oil price in FY17, the second quarter seemed to offer the first rays of hope that corporate earnings had finally recovered and the third and fourth quarters were expected to be the proof in the pudding that corporate earnings were well and truly on their way upward. Market experts predicted a new high for the Indian markets by the end of the calendar year and the markets began rising in anticipation. 

     After all, the Indian growth story had well and truly begun and every negative event was already priced in. The Brexit was at least two years away, Trump had been elected, China had seemingly stabilized, oil was unlikely to skyrocket, inflation was under control, the GST was in place, the Rupee had found some support and Lindsay Lohan had been out of mischief. The markets, in anticipation, crept up close to a new lifetime high. The tomorrow that everyone had been expecting was just around the corner and the Indian Bull Run would finally begin. And then, just when it seemed that nothing could go wrong, as if right on cue, there was a bolt from the blue.

     On November 8, in an unprecedented move, Narendra Modi announced a nationwide demonetization in a bid to cleanse the country of its black money and both Rs. 500 and Rs. 1000 denominated notes were no longer legal tender. The government’s move opened a veritable Pandora’s Box and threw the entire nation into chaos. And of course, the Sensex did its bidding and fell off a cliff. While the demonetization was intended to flush the black money out of the system, it also hit India Inc. right where it hurt. With little cash in hand, the Indian consumer began putting off discretionary purchases and barring the most essential items, demand virtually plummeted.

     While the demonetization is not the first instance of its kind in the world, it certainly is the largest in scale. Demonetizations on a much smaller scale have been undertaken in countries such as Zimbabwe, Argentina, Nigeria and even Germany but most have been unsuccessful, if not complete failures. The outcome for India Inc. has been no different. With the exception of the banking sector, which saw a huge inflow of deposits, giving it access to funds at a lower cost, most industries suffered a knockout blow, especially those sectors that operate largely on cash. While the banking sector has seen a large inflow of low-cost deposits, it now needs to deploy those funds in the form of lending or else it would be saddled with more and more deposits that would result in a higher interest outgo. Deploying those excess funds in today's market may not exactly be a walk in the park. Virtually every company’s management has reported a sharp fall in sales, production cutbacks and subdued demand outlooks in the weeks following the demonetization. Working capital cycles have been impacted, supply chains have been disrupted and earnings have had the wind knocked out of them. In the long run, the organized sector is expected to benefit from the exercise and gain market share, with the unorganized players having been virtually immobilized in the midst of the nationwide cash crunch. The move towards a cashless society should benefit the organized sector as well.

     A demonetization in one of the world’s largest economies was truly a novel exercise and one that has turned out to be an economic experiment, the likes of which hasn’t been seen before. After all, close to 86% of the nation’s cash was rendered obsolete in one stroke. However, while the government claimed that it would expose large stashes of hidden cash, the fact of the matter is that almost 90% of the currency has found its way back to the banking system, largely unsettling the government’s estimates on the level of black money in the economy. With the 30 December deadline for depositing cash in the banks still days away, the number would only rise. The demonetization did hit the hoi polloi the hardest and that creeping near-90% deposit figure does ridicule the government’s claim on the levels of black money splashing about in the economy. That double blow may go on to batter the BJP government in the upcoming elections, given that the government and the Prime Minister himself have staked their reputation, image and mass appeal on the demonetization move.

     The demonetization may have aimed at ridding the country of its black money, curbing the flow of counterfeit notes from China and Pakistan or even a sinister plot to incapacitate the BJP’s opponents in the upcoming Uttar Pradesh elections. While the demonetization may have been noble in its intent and a step towards transitioning the country to a cashless economy, it has undoubtedly dented investor confidence in the Indian growth story and temporarily sent foreign investors running for the hills. India’s markets are still largely FII driven and while foreign investors seek growth, they are usually the first to pull out funds at the earliest signs of trouble. Sentiments certainly haven’t changed for the better after what the country has witnessed. After all, the government itself has indicated that the demonetization move may just be the first of its kind and if there’s one thing that the markets detest, it’s uncertainty.

     As far as the backlash goes, with the opposition now up in arms, the GST rollout itself is doubtful and has been pushed back by several months, at the very least. Needless to say, India’s GDP growth too would suffer a setback and fail to meet estimates for this fiscal and beyond as well. The demonetization will surely shell – shock the black economy and the unorganized sector but an overall healthy economic growth cannot be achieved without some bits and pieces of both running parallel. Of course, corporate earnings growth has taken the biggest hit, with even the most resilient FMCG companies reporting falling sales and curtailed ad expenses. Now, the market only expects earnings growth to rebound in the first quarter of the next fiscal at the earliest. And of course, when the Q3 and Q4 earnings seasons roll around, most companies’ managements would conveniently use the demonetization excuse to window dress a lacklustre performance and buy some more time for ramping up business and driving earnings growth.

     Nevertheless, as far as the bourses go, with the Fed rate hike in place and two more slated for 2017, the outlook for the next few months isn’t as optimistic as it was and valuations are slowly descending to match the fundamentals on the ground, even as the froth is being blown away. A sharp rally may only resume when… no, not when… if earnings growth does pick up in the next fiscal. With that being said, declines in the market are being bought into and some support is emerging, even as a base seems to be in place. Domestic investors are cautiously deploying funds to make fresh investments, even as foreign institutional investors are slowly making a return, all in the hope that the demonetization saga is, just like every other event in the past, a temporary setback and that tomorrow would be brighter than the dark days of the present.

     The distance between insanity and genius is only measured by success, as Jonathan Pryce, in the avatar of the evil media baron Elliot Carver, famously said in ‘Tomorrow Never Dies’. The demonetization exercise, with nearly nine-tenths of the country’s cash back in the banking channel, a knockout blow dealt to economic growth and a country thrown into disarray and chaos, does seem to be a failure in itself. At the end of the day, with global economic growth in the low single – digits, India was the only economy in the world expected to grow at a steady rate of at least 7% annually for several years on the trot. What Narendra Modi has essentially done with the demonetization move is akin to shooting a winning racehorse squarely in the leg. While experts say that the demonetization may play out well in the long run, the short term picture for India Inc. looks bleak at best. And while no one doubts that the Indian growth story is still intact in the long run, the fact of the matter is that the long term is composed of successive short terms and if each of the latter has a nasty surprise in store, the Indian Bull Run would only be pushed further and further back. 

     Hope, however, is indeed a beautiful thing; hope that the Indian growth story would soon be back on track, hope that India Inc. will shine again and hope that tomorrow never dies. After all, as everyone still hopes, the Great Indian Bull Run, just like fate and destiny, can only be delayed but never denied.