Budget has not changed long-term picture

While some churn in stocks can be fairly expected before FY19 starts, as investors realign their portfolio, the LTCG pressure on stocks is likely to be limited, said Anand James, chief market strategist at Geojit Financial Services, in an interview with Sangeetha G. But it’s important to note that even with the 10 per cent LTCG, equities’ return so far is still much more attractive than what you might end up with other asset classes like debt, real estate or gold, he added. Excerpts:

How do you rate the budget for 2018-19?

The market was seen to be more aware of the impact of LTCG and deficit slippage, which is likely to emerge contentious especially with the monetary policy meet scheduled next week. The government’s focus on agricultural development will, however, be deemed a growth multiplier. All in all, there were fewer things to be excited about in this budget.

How will the budgetary announcements impact the market in the short to medium term?

The market didn’t show much volatility on the day of budget announcement, but the next day saw a huge volatility where the Sensex fell by of 840 points and the Nifty by 256 points. We can see a further correction but this may not last long.

The introduction of LTCG on equities and equity-oriented mutual funds at 10 per cent has appeared to deflate sentiments, though much of the post-budget falls have to be attributed to volatility in bond markets and currencies in India following fiscal slippage, and also due to similar volatility in the euro area following tightening of the US inflation expectations.

While some churn in stocks can be fairly expected before FY19 starts, as investors realign their portfolio, the LTCG pressure on stocks is likely to be limited. But it is important to note that even with the 10 per cent LTCG, equities’ return so far is still much more attractive than what you might end up with other asset classes like debt, real estate or gold. I don’t think, cost or tax has been the prime reason for equity’s attractiveness.

Re-introduction of LTCG can also be seen from the angle of bringing in equitability across financial assets, which are taxed differently. Moreover, if LTCG realisations approach Rs 20,000 crore, which is expected, then it’s fair to expect STT to be taken off.

Which all sectors stand to gain from the budget?

Buying interest was seen in the auto stocks on the backdrop of special consideration for the rural development in the budget and decent individual auto sales numbers. Agri stocks are sure to gain since they are going to be the direct beneficiaries of the policy package to alleviate rural distress. Therefore, fertiliser and farm inputs stocks are likely to gain traction as the budget’s rural play plays out. Other sectors in the rural play stand to gain, and the spill off could benefit two-wheelers, tractors as well as farm equipment makers.

The big-ticket healthcare package is billed as a budget stopper proposal. Therefore, stocks in that space will benefit immensely going forward and may deliver returns topping the benchmarks. Insurance, healthcare as well as mid-sized pharma companies also should benefit.

Now that the budget is over, what all would be the major cues that would define the movement of the market in the near future?

The monetary policy will be keenly watched for signs as to the change in RBI’s inflation expectation, given fiscal slippages and the Brent crossing $70. Also important would be how bond volatility is addressed, as there has been tremendous pressure on the same lately.

At the same time, in global markets too there has been significant volatility in bonds that spilled over to equities and currencies. Though FOMC did not move rates at its latest meeting, there has been a change in inflation expectations on the aggressive side especially given the persistent rise in oil. Such posturing is likely to play on the minds of central banks world over, especially India, which also needs to address the fiscal deficit with state and general elections approaching.

How sustainable is the momentum in small and mid-caps?

The fall in small- and mid-caps had begun much earlier in January, even while benchmark indices were recording peaks on successive days. So those stocks were having a reality check much earlier. Further, the government has decided to tax the income distribution on equity mutual funds. By this move, returns from equity mutual funds would be reduced substantially. This may lead to a strong pull back by equity-linked mutual funds from the small-cap and mid-cap space – mainly from mid-caps. Since the time has come to cough up some tax, the pull back from the mid-cap space will be considerable, especially from those highly pricey stocks with untenable valuations. A similar story may pan out in the small-cap space too.

As the earnings season is still on, how do you evaluate last quarter performance of different sectors?

The last stream of numbers that have flowed in have not been inspiring, but a majority have either exceeded or are in line with expectations, which were slightly muted after having factored in the GST impact.

What budgetary announcements would help the earnings in coming quarters?

Domestic auto ancillary companies are likely to benefit from duty hike to 15 per cent against 7.5-10 per cent. Same goes with electrical equipment and footwear sectors, which has seen a hike in customs duty. Healthcare and generic pharma will see benefits from NHPS introduction, though it remains to be seen how far it will take for the rollout and implementation. Increase in agricultural credit could benefit farm equipment, fertiliser, pesticides and seeds, though MSP’s change is likely to be neutral.

What will be your advi­ce to investors who want to enter the market now?

Nothing in this budget has changed the long-term picture, and imposition of LTCG is certainly not a deterrent, especially given the potential from other asset classes. The spillover from currency and bond volatility could extent the draw down in equities for a while longer, but that should provide attractive levels for entry into good stocks that saw record peaks during December-January. The positive side of fiscal slippage et all is that election year could also see increased spending that could reflect in corporate earnings.

sangeethag@mydigitalfc.co

Columnist: 
Sangeetha G.