FPI tax surcharge, US-China trade war weigh on Sensex, Nifty in Q1FY20; will second half be better?

Updated: August 16, 2019 2:08:01 PM

Foreign investors are cautious in the global market and are in a risk-off mode, equity market in US is down by -3.3%, German by -8% and BRICS by -5.3%.

One of key factor associated with it is the aggressive selling by FPIs with a net outflow of Rs 17,500 crore during the same time.

Vinod Nair

In the last one-month Nifty 50 has corrected by 8% to 10,855. One of key factor associated with it is the aggressive selling by FPIs with a net outflow of Rs 17,500 crore during the same time. Foreign investors are cautious in the global market and are in a risk-off mode, equity market in US is down by -3.3%, German by -8% and BRICS by -5.3%. This is due to slowdown in the global economy, the last quarter GDP of important countries like US, Euro areas, China and India has been muted and estimates for CY2019 has been lowered substantially. There are fears that this slowdown can get extended to CY2020 given uncertainty about US-China trade agreement, BREXIT and geo-political issues.

Given the situation, earnings growth is moderating while valuation is expanding. As a result, equity is losing its attractiveness as an investment class and funds are being shifted to safe haven assets like bonds and gold. World Bond index and Gold are up in a range of 1 to 5% in the last one-month. To bounce back from this situation, corrective actions have to be pronounced by central banks by providing enough liquidity and rate cuts, while governments have to announce worthwhile measures and US-China have to come up with a meaningful trade deal. Any delay in timely decisions will impact the global economy and market accordingly. 

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In India, a replica of this negative effect multiplied due to lower than anticipated measures in the post-election budget, weak economic data like GDP and tax collection, a muted start to monsoon season and feeble expectations for Q1FY20 results. This has highlighted the risk of further downside in corporate earnings in FY20. Market was hoping for more than 20% growth in corporate earnings in FY20 for a benchmark like Nifty50. The Q1FY20 has started on a muted note with likely earnings growth of about 11% on a YoY basis. As on 7th August, 34 companies have announced the results which shows an earnings growth of 14% which is marginally below the expectation since the same companies were expected to report 18% growth on a YoY basis. The weakest performers are Auto, Metals, Oil & Gas and Telecom. 

If we assume that Nifty50 earnings growth ends up with about 10% YoY then corporate earnings will have to grow at more than 22.5% in the next nine months. This looks unfeasible since GDP growth has been further downgraded to 6.9% for FY20. There are still hopes that economy will improve in H2FY20 given supportive measures of RBI and Government. RBI has provided a more than anticipated rate cut of 35bps to a repo rate of 5.40%, more such balancing acts are likely in the future since real interest in India are still very high at about 550bps currently (definition; Long-term base rate minus recent consumer inflation (CPI)). 

The recent fall in Indian equity market got aggravated due to impulsive selling by FPIs. Market feels that one of the reasons for the same was higher taxation to FPI’s who are registered in India as trust entities, constituting about 30 to 40%. It is understood that it was not an intention of the FM to tax FPI under super rich category. And they have restrictions and challenges to convert into a company entity. Based on media reports there are thoughts that government is re-considering the issues of FPIs by granting grandfather rights to all income generated by FPI, which may reduce the impact of new taxation.

(This article has been written by Vinod Nair, Head of Research, Geojit Financial Services. The views expressed are author’s own)

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