What explains this move in the market for the last four days — 50,000 and retracting since then?
On the lighter note you can say that this is a walk in the path of correction. One need not be too perturbed about this kind of action. This typically happens when there is too much froth and heightened speculative activity. A little bit of bad news coming in from global markets, negative FII numbers has unnerved the market and the result has been the selloff. It would have been exaggerated because of expiry and also a lot of traders and investors want to go light into the budget coming up on Monday.
Keeping all of this in mind, we are seeing a natural correction after a very long and strong bull market. Investors waiting in the sidelines to invest should grab this opportunity with both hands. Just wait for the Budget on Monday and if that is all okay and there is nothing negative to impact corporate profits, you could look at incrementally moving money into equity.
What could accelerate this selloff?
Budget is a big risk factor. One of the greatest announcements of this government was the reduction in corporate tax to 25.17%. We recalibrated a lot of our corporate earnings based on that tax rate and if a Covid cess is going to come on corporate tax and it goes back to 28-29% or even beyond, then that is going to be negative for equities because one will have to rework the earnings pressure on the lower side and that will make stocks a little more expensive and necessarily the correction.
I am entering the Budget with a great deal of caution. There could be further increase in personal tax rate and STT rates could go up. There could be an increase in taxation on long term capital gains tax. The government is going to look for ways and means to increase resources and they have limited options. So whenever the cess comes, it is going to be negatively taken by the market. The biggest risk factor in equities at this point is the Budget and hopefully if nothing negative comes out of it, then you could perhaps see the slide in stocks abating and then gradually perhaps recovering.
Do you think that there is any sector that could reap strong benefits from the Budget announcements — infrastructure, PSU banks, capital goods or tourism sector?
Not really. We have seen a great deal of rally in infrastructure stocks and Larsen & Toubro and other cap goods manufacturers as well as engineering construction companies have done well right up to this date. They have all rallied by anywhere from 50% to 100% or so from the lows we had seen in March 2020 and that is going to be the sector which will get a lot of preference from the government in terms of government spending. But this is true for all Budgets in the past and really I think that particular pre-budget bet has never really played out.
In my experience, it is best to not go in with any expectations, not go in with any specific trading position or investment position in the hope that something positive would come out for that particular sector in the Budget. At the end of the day, this Budget is all about where the government spending is going to take place and I do not even remember which area was given preference in the last Budget and how that impacted the stocks in that particular sector. So I would not pay too much attention to having a position on a specific sector or stocks prior to the Budget.
