There is a strong likelihood of Indian equities registering losses for a second consecutive year in 2016, belying expectations that the world’s fastest expanding major economy would be a boon to investors, but the downswing should provide opportunities for smart moneybags to build a portfolio at bargain prices.

Several blue-chip shares have either hit their lowest in 12 months or are hovering near their year-lows, and there could be more losses in store as earnings are set to take a hit after the shock withdrawal of high-value bank notes by the government on November 8 upended economic activity across sectors.

The top-30 Sensex shed 1.7 per cent over the week to 26,040, below 2015 close of 26,117.54. The 50-share Nifty index dropped 1.9 per cent to 7,985.75, edging towards the previous year’s close of 7,946.35.

ICICI Securities Ltd said in a note last week that it had lowered 2016-17 earnings expectations for 59 companies in the BSE-100 stocks. Most of the downgrades were in sectors impacted by demonetisation such as consumer discretionary, consumer staples, cement and auto and sectors with global footprint, such as pharmaceuticals.

Fast moving consumer goods (FMCG) companies, which include Hindustan Unilever, ITC, Nestle India, Dabur and Godrej Consumer Products, are among those that face the brunt of slower consumer spending. Market researcher Nielsen said industry sales dropped 1-1.5 per cent in November from the previous month.

In absolute terms the fall at Rs38.4 billion (Dh2.08 billion) is huge, Nielsen said and added that sales of personal care items such as soaps, toothpaste and shampoo saw the steepest decline.

The sudden removal of Rs1,000 and Rs500 notes, which together constituted 86 per cent of the total currency in circulation, without adequate stock or preparation to replace the defunct paper triggered a severe cash crunch, hurting consumer spending, factory operations and normal life of citizens.

The jury is still out on the full impact of Prime Minister Narendra Modi’s overzealous endeavour to clean up the “parallel” economy, which according to some estimates is about $1 trillion or half the size of the real economy. Economists agree the objective to eradicate “black” money, or unaccounted cash, is laudable but say the tools chosen to make this happen are flawed.

Big gamble

“The government undertook a big gamble,” said one executive at a foreign fund who did not want to be identified because of the sensitive subject. “It’s possible they miscalculated the impact and I suspect the wheels could come off the economy in the short term.”

It is certain that the pace of economic growth would slow down in the December and March quarters, but there is concern that the pain may last longer, especially if the authorities are unable to produce sufficient new currency to replace the banned notes by then. Policymakers are trying to bridge the shortfall by encouraging digital payments, which accounts for 1-2 per cent of transactions and is a tough call to get going.

Unfortunately for New Delhi, the demonetisation drive coincided with the unexpected victory of Donald Trump in the US presidential election, and his avowed priority to cut taxes and accelerate US growth has boosted the dollar and triggered an outflow of cash from emerging markets to America. A rise in US interest rates with more increases seen in 2017 could further lure funds away from riskier markets.

Overseas investors withdrew $23 billion from emerging markets since early October, according to a report released on Tuesday by the Washington-based Institute for International Finance. It said this included $18 billion since the US presidential election result, though there were other reasons too for the outflow.

“Nearly half of total outflows over the period were from Indian equities and bonds, partly reflecting the tumultuous situation following the controversial demonetisation initiative,” it said in a statement.

Be brave

Despite all the problems that cloud the outlook over the near term, the fundamentals of India’s $2 trillion economy remains strong. When the dust settles and the focus shifts to the annual budget that will be presented to parliament at the start of February, share prices are more than likely to rally.

“Disruptions always provide openings for bigger profits,” said equity salesman Manish Dalal, who is advising his clients to accumulate select stocks that could rebound sharply when the tide changes. “This is a buy on dips market. We may not have seen the bottom but it’s time to start pickings.”

Deven Choksey, managing director of KR Choksey Securities, is also optimistic about the longer term outcome.

“The great businesses do not fall apart in this kind of a situation,” he told ET Now television channel. “On the contrary, this disruption could be a big time opportunity for some of the bigger businesses and that is where I think the eyes are on. Some of the companies within the auto sector look interestingly positioned.”

He also saw opportunities in some banking, infrastructure and capital goods segment as well as agriculture-related companies.

“In different pockets given the kind of valuations at which they are available, it is becoming all the more attractive now to add into the portfolio.”

Observers say that if New Delhi succeeds in pushing a sizeable chunk of the “parallel” economy to the formal GDP, it would help in widening the tax base and enable the government to cut tax rates.

So the central budget would be a focal point to watch, and expectations are that it would contain sops for the poor as well as measures to bolster the manufacturing sector and accelerate growth.

The executive at the foreign fund put it succinctly: “We’re here for the long haul. India’s fundamentals remain robust, you could see a sharp rebound in earnings from the latter half of 2017.”

The writer is a journalist based in India.