BACK TO THE BASICS

Equity investors are most unlikely to be keen followers of bond markets. Even when their equity investments benefit greatly from events in the bond market, equity investors tend to not follow the interconnect closely. Bottom-up investing is a convenient excuse to say " I don't follow the economic macros". I am only bothered about my investments and how they are faring.

The fundamental flaw in this assessment is that one's stock performance is largely a function of economic macros. How one's stocks perform is deeply impacted by the way the economy is being run. When tougher economic decisions are taken, there is no escape from their impact on one's portfolio. 

The demonetization of 1000 and 500 rupee notes is not just another economic event. It is a black swan. It is going to disrupt everything. Consumption, real estate, liquidity, fintech, banking, industrial production and agriculture are all likely to see deep change. These changes will be behavioral in origin and financial in outcome. Businesses and investments are likely to reflect these sharp changes. So, trivializing the demonetization as an exercise of queueing up before banks and changing old notes would be naive. 

The deeper impact will be evident in government efficiency, tax buoyancy, cashless transactions, tax compliance, liquidity and public investment sentiment. Importantly, the wealth effect which we witnessed during the boom years in the parallel economy will not be playing secularly anymore. Equity investing is yet to factor in that remarkable shift in the public mood. 

How our demonetization and the rapid shift in the global bond markets combine to impact equity is not going to be easy to predict. But, it is a much easier thing to prepare for an event in global bond market. Our wait may not be as long as we imagine.