Happy Days Are Here Again!

Government action can improve or impair market sentiments. This was evident when Finance Minister Nirmala Sitharaman announced tax rate cut on 20th September. This rate cut would go down in history books as a major milestone as this is the first time corporates in the country will pay tax at a rate as low as 22 per cent. We now have world-beating tax rate when it comes to new units set up after September 2019, in whose case the tax rate falls to a mere 15 per cent. This would go a long way in attracting FDIs in the country.

Since the rate cut announcement, Nifty as well as Sensex moved up 8 per cent. The magic the rate cut did is that it changed sentiments on mid caps and small caps which were struggling to hold on to their market caps. The word ‘Recession’ has moved out of the daily conversation post the tax rate cut. India’s market cap, which was at Rs 1.38 lac crore on 19th September, moved up to Rs 1.48 lac crore—a jump of Rs 10 lac crore. See the multiplier effect as the tax forgone by the government due to tax rate cut is Rs 1.50 lac crore.

The Government changes gear to prop up the economy

In the last few days, the government has announced various measures with Prime Minister Modi taking the lead on 15th August from the Red Fort while addressing the nation when he said that the government respects wealth creators. Then came the announcement from the FM that the surcharge which was imposed on the FPIs in the last budget has been withdrawn. Then came the announcement of the mega mergers of PSU banks, which would eventually take the tally of the PSU banks from 27 to 12. The government continues to hint that it is not done with the reforms yet. One can expect more reforms in the coming weeks. There is even talk of the government announcing strategic divestment of couple of “profitable PSUs” before March 2020. And not to forget there could be relief on personal income tax to revive the consumption cycle too.

The spurt in stock prices has been sharp and many investors who were sitting on the sidelines have been caught off-guard. They missed the opportunity to buy their favourite shares. Now they have a dilemma—should they buy when the prices have moved up at least 10 per cent or wait for the correction. Those who are holding shares are not sure how long this rally would sustain. If it is going to fizzle out, should they use this as an opportunity to book profits?

My take is that the Indian stock market trend has changed. This trend is likely to continue to sustain for a longer period of time. Hence, any short selling or booking profits early would be injurious to the health of your wealth. The FM’s announcement ushers in a structural change in the way the tax structure in this country works. In the past, we have seen that whenever tax cuts are done, they has not been reversed in the subsequent years and even by different governments. Hence, one can safely assume that the trajectory of taxes would be down. Since the start of reforms in 1993, the tax rates are on a constant declining mode, and hence logically, it should move down or remain at the same level.

The second thing is that the narrative in the market has completely changed. No one talks about a further fall. In fact, many leading foreign broking houses have revised their Sensex and Nifty targets upward. Morgan Stanley recently revised Sensex target to 45000 by June 2020. Goldman Sachs has revised Nifty target to 13200. Recently, Maruti Chairman Bhargava made a statement that car sales have bottomed out. He expects improvement in M-O-M sales. The sales of Maruti for September are likely to be better than August sales.

The tax rate cut at one go improved the net profit of India Inc by at least 10 per cent. Due to this, earnings would grow at a faster clip, pushing down one-year forward PE for the Indian market. That’s would make Indian market attractive again. Going by the past trend, it has been observed that when the trend changes, it lasts longer and hence this rally that started on 20th September is likely to extend further.

I have little doubt that we are heading towards a new high in both Nifty and Sensex. We are away 4 per cent from all-time high.

The only caveat I would like to add is that not all stocks will move up, especially those who have fallen due to poor financials or bad corporate governance. Hence, even if the market touches new high, these companies may not touch new highs. They may move up for a short time but are unlikely to sustain at higher levels. They would underperform and hence don’t chase them.

It looks like happy days are here again. Investors now can say-Apna time Aa Gaya.