Liquidity may disappear

The Union Budget 2018-2019, presented on February 1, had elections written all over it. It brought some relief for the common man, farmers, healthcare sector and the salaried class without forgetting the MSME segment. But it left the stock market disappointed. As a result the market fell badly.

The Sensex lost 983.69 points, or 2.81 per cent, to close at 35,066.75 points. The Nifty lost 309.05 points, or 2.87 per cent, to close at 10,760.60 points. The fall was almost across all sectors and stocks. Only a few were spared, probably because they were linked to those sectors to which the finance minister has allocated additional funds.

What spooked the market was the introduction of LTCG tax. Long-term capital gains tax has been brought back at a level of 10 per cent. To ease issues, they have allowed grandfathering of the same, based on closing values of equities as of January 31, 2018. This effectively means that as of now investors need not worry about any taxes for the year ending March 2018. The real concern is that it has begun with 10 per cent and may subsequently rise to say 15 and then 20 per cent.

There are talks in the market that indexation benefits maybe given for equities, as is the case with property. While the possibility is strong, simply because it would put on par the other classes of assets, expecting it as a relief because the market has fallen would be naïve.

LTCG is here, but what next? Is this the end of the bull run? Will the two factors driving the market, liquidity and optimism, disappear? The answer is yes and no. There have been a lot of people who entered the market at the fag end of the rally and are now caught on the wrong foot.

Liquidity would disappear and many would be left with sharp losses and unsaleable mid-cap stocks. It is mid-cap and small-cap stocks that have borne the fall and would continue to do so in the coming days as well. The high of BSE Mid-cap was 18,321 points, made on January 9, and the closing was 16,579 points on Friday evening. The fall was 1,742 points, or 10.51 per cent. In the case of BSE Small-cap the fall was 2,336 points with the high being made at 20,183 points on January 15. The percentage fall was 13.09 per cent. Sensex and Nifty made a high on January 29, which was the budget week and fell 3.93 per cent and 3.82 per cent.

The key takeaway from this is that the market was being setup in a manner to distribute stock in the most vulnerable sector or segment and they peaked out well ahead of the rest of the market. While the benchmark indices were still rising, they had already begun their correction.

To add to the woes of the Indian market, Dow Jones has had a terrible Friday and a bad week. On Friday, it lost 665 points and the weekly loss was 1,095 points, or 4.29 per cent.

 Looking at our market, global cues and the market sentiment expecting a weak opening on Monday is a no-brainer. Expect volatility thereafter as markets look to settle down and find reasonable valuations.

The spate of issues one saw in the primary market which includes the main board and the SME segment could see many rethinking their valuation levels as the rising market scenario has disappeared. Valuations are likely to be tempered in the coming weeks if not months.

Look at stocks with a six-month holding period after the second correction in the coming week/weeks. There is money to be made and all is not lost and will never be lost.

Don’t buy because a stock is down a particular percentage from the high, but because the valuation at current levels is attractive and offers scope for appreciation.

 Look for investing opportunities.

(The author is founder, Kejriwal Research and Investment Services)

Arun Kejriwal