Stock Market – Correction or Warning?

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Since the budget was announced, like any other retail investor I have been worried over why the markets have been in such frenzy. Since 1st Feb 2018, Nifty has gone down by 500 points, Sensex has plummeted over 1900 points. Around INR 10 lakh crore has been lost in market capitalization. Since the start of February, Sensex and Nifty have shed more than 4% respectively, which also tells us the story of stock markets worldwide. Be it Sensex, Nikkei, Hang Sang, Dow Jones, all have been hammered by equity selloffs.

Yes, our stock market had borne the brunt of budget this time, but this is not just some correction because of the budget. Or we can say, ‘Timing’ here was of essence once again. There are multiple factors associated with why the market has been in red the past week.

From what I understand these are major reasons for the blood bath on the Dalal Street:

10% tax on LTCG – Yes this is one of the reasons for the red ink on stock indices. Not entirely because of this, but the timing of enforcing this tax has coincided with other global market cues. With this tax coming into effect, definitely the FIIs will withdraw their money. One of the reasons FIIs were investing money in India was, that the markets were generating returns in excess of 30% and all the gain was tax free! So a short term impact was bound to happen as domestic investment in our markets has primarily been weak. The long term effects might be positive, but the bear got its claws from this tax to cling on the markets.

Interest rates hiked in USA - This is also one of the reasons why the stock markets haven’t been able to rebound. Not only India, but the markets all over the globe crashed when there was news of expected spike in US interest rates. In case the rates are hiked, this would mean that US treasury bonds will offer a higher rate of interest. Being a global economic superpower, and a universal currency, this directly impacts the dollar and it causes immense volatility in the equity and bond markets.

Interest rates unchanged in India – In the recent monetary policy review, the RBI has kept the interest rates unchanged. This means that the government is expecting inflation, which would lead to INR losing its strength against USD. This also means that the interest rates will not get any cheaper, which overall will affect the investment cycle in the country. The banks being the major lenders form a vital cog in the whole cycle. No leverage from banks means minimal leverage in the market.

Inflation Challenges - The increase for MSP in the budget is likely to increase the staple food prices. This means now more money will have to shell out to eat the same quantity and quality of food, squeezing the pressure on savings and investment. Further, due to export of agricultural commodities, inflation is bound to increase. Also, India being major importer of crude oil, we might have to shell out more INR to buy US Dollar in order to purchase crude oil. This impacts our currency and also will expose our fiscal vulnerability, which will only add to our and global problems.

Impact of GST and pending recovery of corporate earnings - The 2018 budget was the last, one big event from the government before the general elections in 2019. And the cliché, stock markets were not spared. The hap hazard implementation of GST did bring a blip in our economy. So the next major rebound of market falls on the shoulders of the corporates. Organic improvement in corporate earnings will help India stay relevant in the global market. This gives us the cue of lack of organic growth in our country. The richest 1% of our population owned 73% of the total money generated in our country last year. This also means that we are not able to generate new networth which leaves the reign of money in the few old hands. This makes the market volatility more dependent on the actions and reactions of these few rich people!

Job market woes - The job market woes continue to haunt the growth story of India. Let me give you a grim description of the current situation – In my city there were around 20 vacancies for the posts of clerk and office boy. More than 25,000 youth applied for the jobs. And maximum were graduates and post graduates.India immensely needs private investment which will steer India’s economic growth and employment generation.

No relaxation for the middle class - In this budget, the only relaxation the middle class got was through standard deduction. This also impacted the stock market as the retail investor liquidity also was impacted. The inability to generate new jobs and to fill the old vacancies has put a lot of pressure on the shrinking middle class, which actually forms the retail investor class in the country.

For me these reasons are behind the so called correction. But for me it is a forewarning of a disaster waiting at our doorsteps if we don’t mend our domestic situation, the key to which lies in employment generation.