The entire euphoria that was built since the election results came crashing down with a thud as the equity markets tanked. All sectoral indices took a severe beating and amidst huge volumes the markets pronounced their judgement. However, sanity is expected to be restored as the post-election euphoria gives way to some pragmatism. ?Markets may slip down to around 3,800 ? 3,900 over the next couple of months,? says Dilip Bhat, joint managing director, Prabhudas Lilladher.
The scathing reaction to the announcement is based on the complete shattering of expectations that were built into the market. With the huge election victory, there were strong indications that the government would usher in reforms immediately. According to Deena Mehta, MD, Asit C Mehta Investment Intermediates, ?The technical correction seen in the market on Monday has been viewed as a negative reaction to the budget.?
The key expectations were that the insurance sector would witness an increased foreign direct investment (FDI) limit, removal of securities transaction tax (STT), increase in investment exemption limits and a disinvestment road-map. All of these did not happen and the market, which had rallied with these things in mind ahead of the announcements. Instead there was an increase in minimum alternate tax (MAT) from 10% to 15%, and this is likely to have an impact on certain companies.
Anand Rathi , chairman, Anand Rathi Financial Service, reckons, ?The media and the markets had raised expectations and feels disappointed in the short-term due to lack of removal and reduction of STT and specific amounts on divestment, FDI and roadmap of fiscal consolidation.?
Traders had built long positions in the banking sector expecting massive disinvestments. The banks, especially the public sector ones, were quoting at excellent valuations, some of them below their book value. Hence, it made sense to accumulate them, the expectations of a disinvestment only added steam to their momentum, reckons an analyst with a leading FII.
However, not all view this announcement as the end of the road and the reform process has not come to a halt say many experts. Mukarram Bhagat, ED, ASK Investment Holdings, says, ?It?s high time now that we should not expect too much from the Budget which is essentially the Central government?s annual accounts statement laced with a few policy initiatives especially in the rural and social sectors. Increasingly, a lot of policy action is happening at individual ministry levels be it telecom, roads or the financial sector not to speak of the entire monetary and forex management?.
The ?knee-jerk? reaction to the announcement will soon lend itself into a more sane approach. The fundamentals have not changed, in fact they just got better, says an analyst. Hence, there is no reason to panic at all. The markets have climbed 52% in the first quarter and this is the second most steep climb after 1992, so there has to be some reaction or correction. Bhat reckons, ?Short term investors (2-3 months) should brace themselves for some further correction, while the same could provide an opportunity for long term investors to accumulate.?
As regards to the overseas investors, they seem to be happy with the austerity measures and the fact that government seriously intends to get back on the growth track. According to Sukumar Rajah, CIO – Equity, Franklin Templeton Investments, India, ?Given low interest rates and economic growth across the world, global investors are focusing on countries that are likely to grow at a relatively faster pace. India deserves a valuation premium to its peers due to higher return on equity (RoE) levels and high domestic demand component in earnings. As companies raise capital to meet ongoing capex and infrastructure expenditure,we could see an increase in investment growth. Though, the large equity issuance pipeline could cap market upside in the near future.? Analysts are reworking the earnings estimates factoring in the increase in the minimum alternate tax from 10% to 15%. Its impact could be a telling one for several companies.