Post Finance Minister’s (FM) press conference on Friday (August 23, 2019), the mood on the street in general is of hope and cheer. Most pundits, investors and analysts are expecting short term uptick in markets and some also predicting a more sustained upmove.
Reason for their excitement – reversal of surcharge on FPIs (Foreign Portfolio Investors), liquidity boost to PSU banks and NBFCs and expectation of more sector specific revival measures shortly.
Personally, I am comforted with the accommodative stance but continue my caution due to varied other factors.
Key factors that I am considering to strategise my own participation in the markets –1. FPI tax surcharge reversal
This has been the most contended issue since the budget day. FM had increased the surcharge on high income earners (generally coined as super rich) and as a consequence the effective tax rates got increased for FPIs (structured as trusts and Association of Persons). Effective short term capital gain tax rate had increased from 17.9% to 21.4% and long term from 12% to 14.25%.
The same has now been reversed and we are back to the pre-budget position.
My take – Since the budget day, FIIs/ FPIs sold a net of Rs 29,000 crore of Indian equities. Compare this with a net investment of Rs 6,900 crore by them from exit polls to the budget day. So optically it did seem like a critical issue and maybe it was. However, consider this –
- Beside super rich tax, markets in general were not very appreciative of the overall budget due to lack of widely expected fiscal stimulus.
- Also, in last couple of months, there has also been an increasing flow of disappointing news on the economic front – declining auto sales, muted quarterly numbers, uncertain asset quality of the banks, generally tight liquidity conditions, cautious commentary by large corporates etc.
- Globally, the economic situation has deteriorated as well.
2. Domestic economic situation
So to say that outflows were only linked with the increased taxes would be an overstatement. However, in the absence of economic performance, it was surely a constraining factor – which is now gone !
As mentioned above, in last few months there has been a continuous flow of negative news around the Indian economy and situation seemed to have worsened drastically. GDP growth numbers are muted, auto sales is at multi year lows, liquidity situation is tight, asset quality of banks continue to remain questionable, corporate bigwigs have sounded alarms, economists and analysts have cut down estimates drastically.
FM through the press conference seems to have acknowledged the concerns, has announced few measures and also promised to follow-up with more sector specific announcements soon.
My take – my regular readers would know that I have been sounding caution on the economy for last one year. The main reason I have been continuously highlighting – SENTIMENTS (e.g., refer my pre-budget note and pre-election results note).
I don’t belong to the camp that attributes current economic situation to demonetisation or GST. Currency in circulation has exceeded Rs 21 lakh crore currently vs Rs 18 lakh crore before demonetisation. Likewise, based on my limited checks from the unorganised and organised channels, GST seems to have done more good than bad. No one seems to have an issue with the concept and the only concern is around compliance procedures that government seems to have been addressing regularly.
I continue to stand by my pre-budget note for reason on the current slowdow.
I as a consumer, observer and a commoner believe that the main reason for the current slowdown is – sentiment, sentiment and only sentiment. There is a sense of uncertainty, a sense of caution, a sense of holding back.
and the reasons for this cautious sentiment as detailed in the note are – poor return on investments, corporate shake-ups, NBFC liquidity squeeze, poor rural economy and fear of the unknown.
FM did announce few measures to address this and hopefully will announce more shortly. Some measures she announced included higher liquidity to the financial sector, quick repayment of GST dues within 30 days, eased tax resolutions and pass through of lower interest rates to the end consumers. Their exectuion and impact remains to be seen.
Besides, sector specific stimulus will hopefully make the cost of products and services cheaper prompting consumers to spend.
3. Kashmir issue
I continue to await datapoints on the improved sentiments. Any real estate sector specific announcements can potentially change the sentiments very quickly.
Recently, the government took some significant decisions with regard to the State of Jammu and Kashmir – revocation of Articles 370 and 35A and conversion of the state into two Union Territories.
My take – I am still struggling to factor this in my investment strategy. Surprisingly, not many investors are highlighting this. The fact remains that the decision is very recent and of significance. Besides, we as of now are not aware about the reaction of people who are directly impacted.
4. Global factors
I continue to watch this factor closely.
Globally the situation continues to be of caution – economic outllook has deteriorated, yield curve has inverted, US-China tradewar is continuing unabated, hong-kong protests are worsening, Brexit continues to be confusing and North Korea issue has started cropping again.
My take – I have always maintained that India can not move in isolation, especially on the upside. Globally the situation needs to be either stable or positive for us to have a sustained upmove. The fact remains that globally the situation continues to very volatile and confusing. Besides we are getting into a US Presidential election year with the backdrop of the longest running US bull market and a sitting President who loves tweets !
I, therefore, continue to expect a highly volatile global situation.
I continue to remain cautious – was neither pessimisstic before, nor excited now. I continue to expect the news flow to be confusing, keeping the mood of the market sober and movements volatile.
I, therefore will not get carried away to ride the short term over excitement and will continue to focus only on high quality stocks with discilpine.