Budget to Spur Next Trend

Markets were on a roll for the first two days of the week. The third day was sideways and markets were negative on the last day of the week which was also January futures expiry. The BSESENSEX gained 538.86 points or 1.49% to close at 36,050.44 points. NIFTY gained 174.95 points or 1.58% to close at 11.069.65 points. The rally has become so strong in recent days that it took a mere 4 trading sessions for the BSESENSEX to rise from 35k to 36k. This should send a cautionary signal to those who like cues from the market place. Yet another cautionary signal would be the fact that for a second week in a row while the benchmark indices gained, the midcap and small-cap indices underperformed. While midcap this week gained less the small-cap indices lost.

January futures expired on a weak note on the last day due to profit taking. The series however belonged to the bulls who dominated throughout. The gain during the series was 591.75 points or 5.35% to close at 11,069.65 points.

Dow Jones continues to be on a roll and gained 544.99 points or 2.05% to close at 26,616.71 points. It has gained almost 10% since December 2017, and the chart looks like a climb to Mount Everest. This could be taken as yet another warning signal for the puritans.

Coming to the week ahead we have the budget to be presented on Thursday the 1st of February. While the importance of the budget as the nation’s financial statement cannot be taken away, the overall significance is reducing over time. This year the exercise assumes significance as this would be the government’s last full budget before elections are held in April May 2019. Further the key state of Karnataka ruled by the opposition goes to vote in April-May of this year and there would be elections in three to four North East States as well. This would be followed by elections towards the year end in three BJP ruled states of Rajasthan, Madhya Pradesh and Chhattisgarh.

Gujarat election result analysis has shown that it was the farmer agitation in Saurashtra over cotton prices coupled with the Patidar movement which caused the loss of seats. There was no impact of demonetisation or introduction of GST and one could be sure that course correction would be visible in this budget on this front. Further the deal where ONGC bought the government’s stake in HPCL and helped the divestment target to be met and also keep the fiscal deficit under check, gives indications of the mind of the FM when presenting the budget. He would give sops to the common man but balance the budget.

While on the one hand he needs to pamper the man on the street particularly the “chaiwallah” and the “pakorawallah” and help in making his life easier, the balance of this has to come from industry and markets. The soft target this year is likely to be LTCG or long-term capital gains tax. While the same would not be abolished it would certainly be tinkered to bring about equality and reduce abuse. Last year dividend tax ceiling was introduced and dividend above 10 lakhs was taxed separately. This year in the case of long term a similar ceiling could be introduced as well. Further the holding period is likely to be raised from the present one year to maybe two years or in extreme case to three years. The rational would be that the same be brought in parity with the current benefit given in the case of debt schemes. A more practical or pragmatic approach would be to link it with gains from property which is two years.

Changes seem imminent as there is also a feeling that the spate of public issues in the SME segment and the irrational movement in penny stocks used to generate long term capital gains exempt from tax need to be curbed. The question is if changes are made how would the market react?

There is a provision in the GAAR regulation which safeguards against this. In the eventuality of a change in the provision in LTCG and people selling post announcement to avoid tax in future would be covered by this provision. Once this clarity emerges the sell-off would be averted.

In primary market news there is the listing of Newgen Software Technologies Limited on Monday the 29th of January. The company had tapped the capital markets with its simultaneous offer for sale of 1.35 cr shares and a fresh issue of Rs 95 crs in a price band of Rs 240-245. The issue was subscribed 8.25 times.

The offer for sale from Galaxy Surfactants Limited opens on Monday the 29th of January 2018 and closes on Wednesday the 31st of January 2018. The company proposes to sell 63,31,674 equity shares in a price band of Rs 1,470-1,480. The company had tapped the capital markets earlier in May 2011 and the attempt was unsuccessful. The QIB portion remained undersubscribed. A lot has changed in seven years and revenues, profits and market capitalisation has changed significantly. What has not changed however is the fact that the issue was expensive in 2011 and hence not subscribed and remains even more expensive in 2018. The big difference is the liquidity and the issue would get subscribed on the back of HNI leverage. While the company’s fundamentals are good, the issue of valuation would always remain. It may be a good idea to look at this issue post listing when the euphoria in the markets have also cooled off.

If all goes well in the budget expect a deluge of primary offerings which would sweep you of your feet. The pipeline of issues is too strong and one hopes that people get the pricing right.

The week would be volatile on account of the budget event. Use any irrational moves to play the contrarian and sit on the side-lines otherwise. We have witnessed a sharp rally which has lasted for over ten months and for the same to continue one needs many more parameters. Wait for the time and understand the budget before taking further action.

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