Shaken and stirred
Unstable times call for stable measures. Sit tight and do not do anything rash or adventurous, till we are in calmer climes
FM Arun Jaitley at Parliament House during the Budget Session. Pics/PTI
The budget was presented on Thursday, February 1, and had election written all over it. The general elections are scheduled for April-May 2019 but there is talk that they may be held earlier. Whether it would be preponed, or held as scheduled, only the ruling government knows. However, the budget had little for every one of the 98 per cent of India's population. It did not cover the remaining 2 per cent of the population who corner more than 75 per cent of the nation's wealth.
Railway Minister Piyush Goyal gives an autograph to school students at Parliament House during the Budget
Farmers and agriculture, education, healthcare, salaried employees, senior citizens, all were covered. The tax rate for MSME for people having a turnover of more than 50 crore but less than 250 crore were also given a tax cut like those earlier with turnover of upto 50 crore. The budget also took care of the suburban railway network of Mumbai and announced huge capital outlay. With an eye on Karnataka elections, it announced funds for the suburban network of Bengaluru as well.
There are enough reasons for one to be happy and unhappy with the budget. However, the one single reason which saw the sell-off was the reintroduction of Long Term Capital Gains (LTCG). The LTCG was reintroduced this budget. The big relief given was the fact that the portfolio has been grandfathered to January 31.
In simple terms, for a lay investor grandfathering means that the entire portfolio is marked to market as on December 31 with the closing price becoming the purchase price. Any gain over this price when sold, would attract tax at the rate of 10 per cent if such investment is held for more than 12 months and 15 per cent short term tax. For example, if you bought shares at R 50, two years ago and the current price of the same is R 120, then for purposes of the law your purchase price would change to R 120. Since the term of one year or more is over, it is already long term. Whenever you sell shares, the difference between selling price and this new grandfathered price of R 120 would attract tax at 10 per cent. Going forward, the investor would have a choice whether he wants to hold for the long term and pay 10 per cent tax, or, sell in a shorter period paying 15 per cent tax. This could lead to more volatility. The budget is over and done with, so what next?
The high of BSEMIDCAP 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 BSESMALLCAP 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. The BSESENSEX and NIFTY made a high on January 29 which was the budget week itself and fell 3.93 per cent and 3.82 per cent. The key takeaway is the fact that the markets were 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 benchmark indices were still rising, they had already begun their correction.
Considering the above and the terrible Dow Jones on Friday, a gap down opening on Monday is a certainty. How much more after that, one is unsure. A lot would depend on global markets. However, post the correction in the beginning of the week, there is a possibility that markets may see a pull back rally in the middle of the coming week and then again fall. Markets have been shaken and need time to consolidate before one can see a meaningful rally once again. Do not sell in panic and there is no need to be adventurous right away. Choose the right stocks and wait for markets to stabilise. This stabilisation may be anything from a week to a month away.
Arun Kejriwal is founder of the Mumbai-based advisory firm Kejriwal Research & Investment Services Pvt Ltd.
Disclaimer: No financial information whatsoever published anywhere in this newspaper should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is for educational and information purposes only.
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