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Modi, Paytm & Midnight Demonetization: June Market Strategy

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The following is an excerpt from Zacks Chief Strategist John Blank’s full Jun Market Strategy report To access the full PDF, click here

The Nation of India Catches My Eye

Let’s discuss dumb policy execution -- well outside of the 2017 U.S. media focus on all things Trump.

This is global news. Most of you probably haven’t paid attention to it.

On November 8th, 2016, the Government of India announced the demonetization of all 500 rupee (US$7.80) and 1,000 rupee (US$16) banknotes of the Mahatma Gandhi series. Think of these rupee notes as ten-dollar and twenty-dollar bills in the U.S. context.Overnight, 86% of cash in Indian circulation was voided. In this country, consumers are almost 90% cash reliant. Chaos ensued.

The Prime Minister of India, Narendra Modi announced the demonetization in an unscheduled live televised address. In the announcement, Modi declared that use of all 500 and 1000 rupee banknotes would be invalid past midnight. He then announced the issuance of new 500 and 1000 rupee banknotes in exchange for the old banknotes.

His government claimed this action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism. India’s major BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the day after the announcement.

In the days following this sudden demonetization, the country faced severe cash shortages, and showed other severe detrimental effects across the Indian economy. For example, people seeking to exchange their bank notes had to stand in lengthy queues. Several deaths were linked due to the rush to exchange cash.

Initially, the move received support from several Indian bankers, as well as from some international commentators. However, the move was equally heavily criticized by others as poorly planned and unfair, and was met with protests, litigation, and strikes.

Members of the Indian opposition parties heavily criticized it. They led debates in both houses of parliament. It triggered other organized protests against the government in several places across India. The suddenness of the move was also heavily criticized by prominent economists and by the world media.

As of June 2017, this sudden Modi move is considered to have reduced the country's GPD growth rate and its industrial production. Commercial vehicle output, rail freight, service tax receipts, and home appliance sales have all slowed down. Some economists set the India GDP growth forecast at +6.4% for 2017, instead of +7.0%.

The unqualified winners of the demonetization were the mobile wallet players. The market leader in India is Paytm. It claims to have 170 million users in India. Paytm said it got a traffic increase of +435%, and a +250% increase in overall transactions and transaction value.

Arguably, the surge in business for mobile wallets was natural -- at least for the 17% of India’s population that owned a smartphone.

There are other pluses emerging. There are plans to mandate digital payments at gas stations, hospitals, and universities, with cash transactions over $4,500 banned altogether. Indian Railways will no longer levy a service charge on tickets booked online, and the government is removing duties on point-of-sale devices and fingerprint readers.

…But, it sure seems dumb to do this overnight!

Zacks June Sector/Industry/Company Stock Pick Telescope

As the second quarter reaches full maturity, a breadth of covering analyst opinions claim that cyclical steam is notably picking up inside the U.S. economy.

Info Tech with its Semi industry and Misc. Tech keeps on charging ahead.

However, the two biggest sector pickups in May came from Consumer Discretionary and Industrials. The number of Very Attractive Industrial industries is truly impressive, given the prior slump seen in previous quarters. The consumer is spending again too.

Health Care and Financials keep treading water. No worry, but no pickup either.

The biggest and sole loser is the Energy sector. This group has been flagged.

(1) Info Tech maintains its Very Attractive rating. Semis stay HOT, and Misc. Tech is now hotter than Semis.

(2) Consumer Discretionary rises to Very Attractive after last month’s Market Weight. The industry leaders stay Leisure and Publishing. The big loser stays Home Furnishing-Appliance.

Zacks #2 BUY: Marine Products Corp. (MPX - Free Report) )

Marine Products is the third-largest distributor of stern drive powerboats in the U.S. The company designs, manufactures and distributes premium-branded Chaparral stern drive pleasure boats and Robalo outboard offshore fishing boats, and continues to diversify its product line through product innovation and strategic acquisition.

(3) Industrials rise further to Very Attractive from Attractive. The leaders are many: Machinery, Airlines, Railroads, Pollution Control, and Conglomerates. At 4.3% unemployment, cap-ex spending cycle is really picking up.

Zacks #2 BUY: Stanley Black & Decker (SWK - Free Report) )

Stanley Black & Decker, Inc., formerly known as Stanley Works Inc., is a diversified global provider of tools and related accessories, mechanical access solutions; electronic security solutions, engineered fastening systems etc. The Company has three reportable segments: Construction & Do-It-Yourself, Industrial and Security.

(4) Consumer Staples falls to Attractive from Very Attractive. The clear industry leader here is Agri-business now, surpassing strong Soaps & Cosmetics and Tobacco industries.

Zacks #2 BUY: Monsanto MON)

Monsanto is a leading global provider of technology-based solutions and agricultural products for growers and downstream customers, such as grain processors and consumers, in the agricultural markets. The Company provides a combination of herbicides, seeds and related genetic trait products.

(5) Materials stay Attractive. But leadership has changed. Chemicals lead again, but Paper and Building Products came in strong in June. Steel and Metals-Non-ferrous fell back to a market weight.

(6) Health Care maintains an Attractive rating. The leader stays Medical Care.

(7) Financials keep a Market Weight. The leaders are Investment Banking & Brokering, and Banks & Thrifts. Investment Funds stayed the big loser.

(8)Telco Services stay a Market Weight.

(9) Utilities get to a Market Weight. The industry leader is Water Supply.

(10) Energy falls all the way to Very Unattractive. The big losers are Coal, Oil & Gas Pipelines and the Oil & Gas Integrated.

The following is an excerpt from Zacks Chief Strategist John Blank’s full Jun Market Strategy report To access the full PDF, click here.

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