Ridham Desai: Ridham Desai outlines possible Budget devils that may dampen market mood

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NEW DELHI: If we go by historical trend, odds are stacked against the market after the Union Budget this year, Morgan Stanley India’s Equity Strategist Ridham Desai said in a report.

An analysis shows that the market falls on two of three occasions in the 30 days post the budget. The probability of such a fall rises to 80 per cent if the market has risen in the 30 days preceding the budget. Only three times has the market been up both pre and post the budget.

“This year, India is tracking higher on an absolute basis and relative basis so far in January and, if this trend persists to budget day, the odds are stacked up against a further up move,” said Desai.

He added that the budget’s influence on short-term market performance is declining but expectations as measured by pre-budget performance are still important in determining what the market does after the budget.

Finance Minister Nirmala Sitharaman is set to present the Budget for the upcoming financial year on February 1. The increased thrust on infrastructure and other structural reforms during the last budget had induced a rally in the market. Investors will be looking for a repeat this year.

“While post budget performance is harder to predict, the one thing that seems more certain is that volatility on budget day will be high even as this volatility has been declining over the past three decades,” Desai said.

He outlines six things that investors should keep an eye on during the Budget:

Fiscal consolidation

Tax collection throughout the year has seen massive growth. This tax buoyancy gives the government rare luxury for increasing spending and/or consolidating the fiscal without the usual constraints.

“If the government focuses on consolidating the fiscal, we expect financials to outperform. If it prefers spending, consumer discretionary and industrial stocks will likely fare better. We are overweight all three,” Desai said.

LTCG tax hike

A hike in the long-term capital gains (LTCG) tax could be a serious dampener for stocks, Desai said. He added this will especially impact the broad market like we saw in 2018 when the long-term capital gains tax was reintroduced.

Divestment

It is another metric that investors will keep an eye on. The target for asset sales will add to the rising supply of new stock into equities. The timing and size of such supply will likely determine its impact on equities, Desai said.

Fiscal target

A credible fiscal target with its concomitant effect on macro stability will likely be cheered by stock markets and also give the RBI greater flexibility in its exit from negative real rate.

Inclusion in bond index

India is up for inclusion in global bond indices, which will result in massive inflows. But resolving the tax issues around the Fully Accessible Route (FAR) bonds is necessary for India’s inclusion in the global bond indices, analysts said.

“Such an inclusion will likely flatter the yield curve in 2022 and will be bullish for financials. The accompanying bond flows will also improve India’s macro stability and growth prospects,” said Desai.

More boosters for India Inc.

While the government has focused on fiscal incentives for the manufacturing sectors—with a number of performance linked incentives (PLI) scheme—a post COVID-19 environment offers an opportunity to further boost services exports, Morgan Stanley believes. An extension of the low corporate tax rate for new investments in the services sector will be timely and augur well for overall earnings growth, it added.

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Source: The Economic Times
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