All stock market and mutual fund investors are keen to know how the budget will impact their investments. After the lows of 1st and bloodbath on 2nd of Feb, 24 hours from the budget, investors are at a loss if the trend of the last week will continue or if this is a buying opportunity. Let us give you a few important data points that shall help you understand how the stock markets may move in the coming months.
Current Valuation: Current valuation of the stock markets are excessively high. More so in the mid and small cap space. Most of the correction in the last 2 days (and last 1 week) is in the mid and small cap space. So when the budget was presented the markets were anyways overbought or excessively priced.
Macro-Economic Fundamentals: India’s Macro-Economic fundamentals suddenly don’t look good. Oil prices, which have already moved up still remain a worry and another worry is the fear of fiscal slippage. More so in an Election Year! Bond yields have already moved up in the last 6 months by over 150 basis points. 10-year G sec is around 7.48%. The amount committed to addressing the rural distress is huge. Support committed to farmers in the form of MSP (Minimum support prices) looks like wasted revenue expenditure in an election year. All this may contribute to inflation and further tightening of monetary policy. The economic survey had warned that stock prices have run much ahead of the earnings and may correct sharply. However, like in all bull runs no one seems to give heed to these warnings.
Rate hike by US Fed: US bond yields have gone up to 2.78% and fed is likely to raise the interest at least 3 times this year. This will lead to capital flight from India and other emerging markets.
Long-Term Capital Gains tax and continuation of STT: Finance Minister has introduced a 10% LTCG while retaining Securities Transaction Tax. Experts feel that STT could have been abolished. Never ever has this country seen LTCG and STT at the same time. This surely is a dampener.
Election year: Capital markets and fund managers will keenly watch upcoming assembly elections in 9 states. More so in MP, Rajasthan, West Bengal and Chhattisgarh. This may give a pointer to the 2019 general elections. If the probability of a hung assembly goes up, markets will factor this in as a huge negative.