Bigger concern of the lingering cash shortage and its impact on the overall economy in the coming months triggered panic selling in stocks of sectors which had direct bearing due to the note ban decision

In the run up to US Presidential election outcome in early November and the Federal Reserve meet a month later, local stock market traders virtually followed their global peers for direction. However, there was a surprise element in store just few days after Diwali festival that shook the sentiment of domestic investors on the Dalal Street. Trend in global equity markets in the following days hardly mattered for local traders as the demonetisation announcement by Prime Minister Narendra Modi on 8 November night sent investors scurrying for cover in the following sessions.

A day after the note ban announcement, benchmark Sensex crashed nearly 1,700 points intra-day but recovered most of its losses to end 339 points lower on 9 November, although the slump partially came on the back of US poll results that took global investors by surprise after Republican president candidate Donald Trump triumphed over his Democrat rival Hillary Clinton.

In days following the demonetisation announcement, investors exited stocks at will dragging Sensex sharply lower. However, bigger concern of the lingering cash shortage and its impact on the overall economy in the coming months triggered panic selling in stocks of sectors which had a direct bearing due to the note ban decision.

Since 8 November when the decision to ban high value currencies of Rs 500 and Rs 1,000 came into existence, the benchmark lost 4.4 percent. However, the sector that bore the maximum brunt was real estate with realty index under-performing the markets, tumbling 15.3 percent during the period.

Analysts believe the sector that generated lot of black money over the last several years could be in for tough times in next few months. With nearly 86 percent of cash flushed out of the system following the note ban, experts opine consumers were likely to postpone their plans in the near term resulting in falling sales for home developers. As the sector has been dominated by unorganised home developers, most of them had been demanding a portion of the overall amount in black from the buyers, leading to huge generation of illicit wealth over the past many years.

Being the worst hit in the sectoral pack, the BSE Realty index tumbled over 15 percent during the period. Among the key laggards, shares of HDIL crashed 25 percent and that of DLF 23 percent.

Other two sectors hit hard by the note ban decision were consumer durables and automobile. Before the demonetisation announcement, these two sectors were on a strong growth path mainly owing to robust consumer spending. Along with the Centre's decision to release seventh pay commission funds to government employees during the year and the bountiful monsoon, automobile and FMCG companies were hoping to end the year with robust growth numbers. However, the sudden demonetisation decision and subsequent cash shortage prompted consumers to tighten their purse strings, resulting in disappointing sales for them.

Already, passenger vehicle sales in November grew by just 1.8 percent, the slowest monthly sales in several months. Domestic car sales ticked up to 173,606 units as against 173,111 in November last year, according to data released by the Society of Indian Automobile Manufacturers (SIAM).

On the other hand, motorcycle sales last month declined 10.21 percent to 778,178 units, from 8,66,696 a year earlier, while total two-wheeler sales in November fell 5.85 percent to 12,43,251 units compared with 13,20,552 units in the year-ago month. Sales of commercial vehicles, too, were down 11.58 percent at 45,773 units last month.

Further, car makers such as Maruti Suzuki, Honda Motor, Hyundai Motor, Mahindra & Mahindra, Renault Nissan and Ford Motor resorted to extended shutdowns from a week to around two weeks in the current and next month.

For white goods manufacturers, sales of televisions, refrigerators, washing machines and microwave ovens declined 38 percent in November over the corresponding month of last year, Times of India report said.

In fact, the industry was on the verge of posting healthy sales numbers in October-December quarter, but the demonetisation decision came as a cropper, the ToI report said.

"Demonetisation has caused some amount of postponement in consumer spending, but life doesn’t stop, it’s just a pause in their sending. The moment situation turns normal, which we believe will happen soon, the spending will see volcanic eruptions driving these sectors FMCG, banks, NBFCs and others to post good numbers, bringing back entire economy to normalcy," said Jimeet Modi, CEO, SAMCO securities.

With disappointing sales likely to reflect in the earnings of these companies in the upcoming quarterly season, investors already reduced their exposure to several FMCG and automobile stocks. While the BSE Consumer durable index dropped nearly 11 percent, the BSE Auto index fell 9 percent during the period.

Among the automobile laggards, shares of M&M crashed over 15 percent, Ashok Leyland plunged 14 percent, Eicher Motors slumped 11 percent, Tata Motors skid 13 percent and HeroMoto Corp was down 10 percent.

Similarly, in the FMCG space, shares of Britannia Industries declined 11 percent, Colgate Palmolive eased 9 percent, Dabur India lost 7.8 percent and Godrej Consumer dipped 3 percent.

Concerned over sluggish credit growth, rising bad loans and subdued demand for loans, the banking sector also fell out of favour with investors. The BSE Bankex dropped nearly 8 percent since demonetisation announcement with shares of Axis Bank, Canara Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank and Punjab National Bank falling over 10-19 percent, respectively.

Other sectoral indices such as telecom, capital goods, metals and Power fell over 1-5.5 percent.

On the other hand, IT and oil & gas stocks bucked the trend amid hopes of higher outsourcing orders from global corporates going ahead and firm crude oil prices following OPEC's decision to cut output.