Deepening concerns about a slowdown in India’s economic expansion are weighing heavily on the country’s equity markets as money managers brace for a sharp drop in corporate earnings when quarterly results begin to pour in from early January. Market pundits say a shakeout would throw up opportunities for investors in early 2017.

Advance taxes paid by many large companies for the December quarter are lower than what they had filed a year earlier, indicating a radical government move in early November to replace 86 per cent of the currency in circulation — ostensibly to flush out unaccounted cash piles and blunt counterfeit notes that fund militant activity — has caused significant disruption of economic activity.

Consumer goods giant Hindustan Unilever Ltd paid Rs5.6 billion (Dh303.1 million) in advance taxes, down 9.7 per cent from Rs6.2 billion for the same period last year, according to data from the Income Tax Department. Tata Steel’s taxes paid dropped 11.1 per cent, motorcycle maker Bajaj Auto’s fell 17.9 per cent, UltraTech Cement’s dipped 12 per cent and Tata Consultancy Services’s were down 3.75 per cent.

State Bank of India, the country’s top lender, taxes paid plunged 25.9 per cent and ICICI Bank’s fell 27.3 per cent, though the reason for the bigger drop could be because of expected provisioning for bad debts that have plagued the sector for many quarters in a row.

“The next trigger for the market is the quarterly earnings,” said equity salesman Anmol Bhushan. “The news on that front is not going to be pleasant. The market has begun to discount this.”

Cash crunch

The government’s inability to print sufficient new notes to replace the more than Rs15 trillion in banned Rs1,000 and Rs500 currency has caused a severe liquidity crisis with banks imposing heavy restrictions on the amount of cash that depositors can withdraw. For an economy where more than 90 per cent of the transactions are dealt in cash, the shortage has dealt a body blow across sectors.

The central bank has pumped in just over Rs5 trillion of new notes into the banking system since November 8 announcement of demonetisation, Economic Affairs Secretary Shaktikanta Das said on Thursday. Experts say it would take at least by next April for the authorities to fully make up the shortfall in currency in circulation.

Auto sales in November grew at its slowest pace in nine months, belying expectations for a big bump up in the wake of payment of hiked salary arrears to more than one million central government staff and pensioners. Leading sport utility vehicle maker Mahindra & Mahindra saw its sales fall 22 per cent as discretionary spends by customers took a hit.

Sales of motorcycles and scooters, where more than half the purchases is on cash payment, fell for the first time in 11 months.

The top-30 Sensex, which is closely tracked by fund managers, shed 1 per cent over the week to 26,489.56 and the 50-share Nifty shed 1.5 per cent to 8,139.45, posting their biggest weekly decline in a month.

Both the indices are nearing their 2015 close — the Sensex had ended at 26,117.54 and the Nifty at 7,946.35 — and could finish 2016 with losses for the second year in a row.

Citing the demonetisation as well as weak investment and agricultural slowdown, the Asian Development Bank this week lowered its 2016 growth estimate for India to 7.0 per cent from 7.4 per cent, but maintained its growth forecast for 2017 at 7.8 per cent.

Bide your time

The chips are clearly down and there would be pain in the near term. However, the turmoil would also throw up opportunities for investors to scoop up shares on the bargain and growth in the coming years is expected to perk up.

Strategists at Morgan Stanley say that India is “looking attractive” and could provide double-digit return in 2017. They see the Sensex at 30,000 by next December.

The investment bank is positive on consumer-discretionary, financials and technology, but is underweight on staples, energy, industrials, telecoms and utilities.

BNP Paribas sees India as a “core” overweight, and says shares are pricing in concerns about economic growth and earnings. New Delhi’s push towards online transactions and the roll out of a new Goods and Services Tax (GST) will boost the formal economy, bringing in big benefits in the longer term, the brokerage said.

“There could be a more negative sentiment through the result season because the numbers coming through will be weaker than expected, but broadly our view on emerging markets is you are going to get a better buying opportunity than today,” Adrian Mowat, chief emerging market and Asian equity strategist at JP Morgan, told ET Now television channel.

Besides the currency replacement, businesses would start to prepare for the GST in the next quarter, making it difficult to chalk out the trend in economic activity. “This means that India has a relatively choppy ride going ahead because we are not convinced on growth rates,” he said.

The securities house is neutral on India, but is optimistic on some sectors.

“The Indian call is we have a lot of conviction around sectors and so we are overweight on materials, selected consumer discretionary which can be beneficiaries of domestic reflation trades and financials,” Mowat said.

“We are underweight on sectors at risk from (US President-elect Donald) Trump policy, expensive defensives like consumer staples, bond proxies. If you look at the construct of the Indian equity markets, the sectors that we like are little bit smaller than the sectors that we know will be hurt.”

“My advice across the emerging world is that you are going to get better buying opportunity in the first quarter,” he said.

The writer is a journalist based in India.