Demonetization in India: Chaos and Opportunity

Wincrest Capital’s View: Opportunities in India

Bullish on India

While in India this past November, I witnessed one of the boldest moves in recent financial history, demonetization. On the same day the global markets were shocked by the election of Donald Trump as U.S. President, Prime Minister Modi announced that as of midnight that night, the two highest denomination notes could no longer be used as legal tender. Those two notes were more than 86% of the value of the notes in circulation.  All 500 and 1,000 Rupee notes, (equivalent to US$ 7.46 and US$ 14.93 respectively), needed to be deposited in banks within 50 days, where they would be swapped for new currency notes over the next six months.  Banks became a hive of activity as people formed serpentine looking queues, spilling on to the roads and wrapping around balconies in an urgency to dispense the scrapped notes.   

The move to demonetize nearly 87% of currency in circulation brought the Indian economy to a standstill. Of the 6 million retail outlets in India, 99% only accepted cash. Thirty percent of Indian workforce are daily wage earners who were paid in cash. They, along with small businesses were most adversely affected given the lack of currency in circulation. The rationale was to reduce black money and encourage digitization. Despite the profound hardship it caused people trying to access cash to pay for necessities, it proved to be a peaceful process and popular with the masses. The economic implications were negative in the short run, but will hopefully be positive in the long run.

Demonetization created confusion among investors sending the BSE SENSEX and NIFTY 50 stock indices down over 6% the day after the announcement. Wincrest viewed this as an example of macro volatility creating a micro buying opportunity.  India is still the world’s fastest growing major economy, and we are bullish about its longer-term prospects for the following reasons: 

1. Indian GDP is expected to more than double from US$ 2 trillion to US$ 5 trillion in the next 10-12 years; 

2. India’s economic growth is not dependent upon the export of natural resources, but rather job creation;

3. Unlike the majority of most major overseas economies, India is relatively insulated from Trump’s protectionist rhetoric; and 

4. In 2014, Prime Minister Modi pledged to provide bank accounts to India’s 1.2 billion people (at the time, 40% did not have one). By the end of 2016, 99% of households had a bank account. I believe this is an inflection point as it significantly increases the total addressable market for consumer credit and mortgages. As Prime Minister Modi says, "When a bank account is opened, it's a step towards joining the economic mainstream."

Wincrest maintains that significant alpha can be generated in the Indian market by investing in companies with a strong economic moat and corporate governance. 

The Trade
Witnessing India’s demonetization forced Wincrest to think about the impact of a transition to a digital cashless economy – and it led to several investment ideas across various sectors and markets.  For example, we shorted money a bricks and mortar money transfer business that derived a material percentage of its profits from remittances to India.  During demonetization in India, there were no queues outside of Western Union’s branches. Why would there be? Cash was not legal tender. If you would like to learn more about the opportunities we have uncovered in India, please contact IR@wincrest.capital .