A sell-off in global equities also dampened sentiment; Rs4.34 trillion in notional investor wealth wiped out
Indian stocks nosedived on Friday as investors were disappointed by a Union budget that focused on populist measures ahead of general elections in 2019 and imposed a long-term capital gains tax (LTCG) on equities. A sell-off in global equities also dampened sentiment, with Rs4.34 trillion in notional investor wealth getting wiped out during the day.
The benchmark Sensex plummeted 840 points, posting its worst post-budget day decline since 2008. The upward revision of fiscal deficit targets for the current financial year and the next also spooked investors.
Ratings agency Fitch said weak public finances constrain India’s sovereign ratings.
At the close of trading, the Sensex ended 2.34% lower at 35,066.75 points. The National Stock Exchange’s 50-share Nifty shed 2.33% or 256.30 points to end the week at 10,760.60 points.
The erosion on Friday was worse for mid-cap and small-cap stocks. The BSE mid-cap and small-cap indices shed 4% and 4.65%, respectively.
“Considering the valuations, specifically in the mid- and small-cap space, a correction was long overdue. Market was in need of a correction, and it found a reason in the budget,” said Navneet Munot, chief investment officer, SBI Funds Management Pvt. Ltd.
Even after the correction, the mid-cap index is trading at 21.8 times expected earnings over the next 12 months and the small-cap index at 18.31 times.
“Weak sentiment in global equities also played their role and bothered Indian markets,” added Munot.
World markets largely traded lower, with Asian equities ending mixed on rising bond yields and caution ahead of the US job reports which was released later in the day. Korean stocks fell 1.68% and Japan’s Nikkei index shed 0.9%.
With the carnage in the equity markets, reintroduction of LTCG tax and bond yields rising, the fixed income market may have become attractive.
“Indian equity market will take further cues from global markets, and earnings trajectory. Now that bond yields have spiked, on a relative basis, investors should also start looking at fixed income markets for investment opportunities,” Munot said.
In his budget speech on Thursday, finance minister Arun Jaitley announced that an LTCG—arising out of the sale of equity-oriented mutual fund schemes as well as from direct equity shares—will now be taxed at 10% if the cumulative capital gains exceed Rs100,000 in a year.
Most investors were disappointed and some felt it would dampen foreign investor sentiment.
Foreign institutional investors have pumped a net of more than $2 billion into Indian shares in January, while domestic institutional investors went slow and invested a net of around Rs400 crore in the asset class last month.
Some felt that Friday’s fall was an over-reaction.
“It is an unwarranted panic reaction. There were similar reactions when securities transaction tax was introduced but over time it was digested well. Indian markets dragged today mostly due to the global markets’ weakness,” said Dhiraj Sachdev, senior vice-president and equities fund manager at HSBC Asset Management.
“As earnings continue to pick up, they will lend support to the markets. The correction will invite fresh buys which will lift equities again,” Sachdev added.
Others weren’t as optimistic.
“We find risk-reward for markets still unattractive,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd. “Investors are finding better value in other markets with positive earnings momentum too, unlike India.”
The Sensex is currently trading at 18.46 times its expected earnings over the next 12 months, making it among the most expensive markets in the world. The Sensex’s earnings per share for the current fiscal has fallen 9.41% since April. For the next fiscal, they have fallen 3.6%.
All the sectoral indices closed in the red on Friday, with the BSE Realty index leading the decline, shedding 6.28%. The BSE basic materials index followed, falling nearly 4%.
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