Budget 2019 & industry view on it…..

Just back from a meeting with Manish Gunwani, CIO of Reliance Mutual Fund. His views about our markets are that we are at a sweet spot where India markets will perform well. Election outcome if the seats are in the range of 180 to 250 for BJP, markets will not react. Less than 220 seats, will see a new Prime Minister, likely candidate is Nitin Gadkari. It was a little out of the box to hear Modi is not a choice, challenges of a bigger democracy.

We have very less contributors on exports. IT contributes $100B and NRI remittances at $80B. Apart from these 2 there are no big contributors. Pharma was giving some support, now with a lot of regulations, it has gone down. While our imports from Oil which is $100B and Electronics at $40B, almost takes away all of our income.

Oil price should reduce which it eventually will over a few years, due to the advent of electric vehicles and solar panel usage. With #MakeInIndia, as we begin to consume more of electronics made from India, both the big shareholders of our Forex expenses will come down. This shows a very bright future for India.

In the immediate period, 2019, though fund houses and fund managers are saying that we will have 10-15% growth, I don’t see a potential, it might take another year to get a boost for our economy.

The budget shows too much dependence on PSU disinvestments. This year Rs.90K crores to come from PSU disinvestments. Every year if we keep selling what will be left. Already government ownership in many big PSU’s have come to 50-55% levels. As it is, they are poor performers, and would not fetch good price, hence finding buyers will be a challenge.

Among PSU’s some are called Nava-Ratna’s & Mini-Ratna’s or Gems. These Gems got their shine because of government business which was like a light shown on a plain glass. Once they come to the outside world and face competition, they are very poor performers. When the light goes off, it is only plain glass with no value.

Continuous selling is also bringing down prices. Example is Coal India, where the stock was offered for sale at one price, then 5% discount, again at 3% discount and it continues. As the sale keeps happening the stock price is not moving up, thereby not giving any growth for the investor.

Now again government want to sell some more shares, which might not be an achievable target. Due to this the planned deficit of 3.4% will not be achieved. There were talks that, for the last 10 years we have been trying to maintain deficit at 3% and not achieved.

Next big damage in this budget was the bringing of a permanent expense of Rs.75K crores in the form of payments to farmers. These kind of facilities cannot be rolled back, no government will want to bit that bullet of non-popularism.

2019 probably might not be a big winning year for the markets. One very good advantage of this condition is that, if there is 2 consecutive years of no or negative returns next subsequent year will be a super star year.

2019 will set the tone for the blast off in 2020.

RBI & Government in a tussle

Resignation by the RBI governor Mr.Urjit Patel after being in office for a little more than 2 years was a big surprise that has come after market hours on 10thDecember. 11th being a big event day with 5 state assembly election results where we are having shaky grounds and the markets having already lost ground, in line with the global markets.

Now, this new development will take a big blow in the markets. Though all the dark cloud will clear in a day or two, didn’t expect this to happen. In the recent weeks there has been a continuous tussle between the finance ministry and the RBI on PCA, Liquidity and Reserves issues.

Slowdown in the economy which is forcing the government to resort to all possible ways to bring in growth. 11 out of 23 PSB’s not allowed to lend due to PCA. Liquidity not available in the markets due to curbing of NPA’s and reducing reserves of the RBI to fund governments deficit.

All of these are not good expectations. When we are fighting corruption and wanting to clean the economy, resorting to again funding without quality assessment will only result to further loss of capital. If the governor had resigned to ensure all of these claims do not happen, it is a good decision. At the same time a big blow to the government when elections are just a few months away.

We spoke about the market reaching the previous bottom in our recent video, didn’t expect it will go there in such a hurry. Probably these events and their outcomes might keep the markets down for some more time to come. Pain for portfolios likely to continue.

FM’s thoughts on Oil & Loan Waiver

Jaitley’s talk at the ET awards, “Users should pay for oil… else fiscal deficit will rise and add to the current account deficit. It will push up inflation, weaken rupee. Tax on fuel prices should come down not by creating fiscal deficit, but through an increase in the non-oil tax to GDP ratio, which is on the rise since last few years. We must create a sense of maturity among people” Very nice thought, if we contribute by way of higher compliance, it will help in getting other benefits.

It felt like, we have only been asking without contributing. When we talk about this to people, they get agitated about paying taxes. It is because, for generations we have been on the receiving end.

Want farm loan waiver, how can that happen? Vice president Venkaiah Naidu said, “Loan waiver can happen only if there is a deposit waiver’. We did not want FRDI to come because we stated poor man’s money in the banks should not get used for the bank’s non-competence. All the deposit holders should be given highest safety on their investments. At the same time banks should waive off loans. This can happen only from the profits that banks make.

And unfortunately our banks don’t have that edge too, because of people running the banks who don’t have big vision.

Happened to hear a banker say that, “De-Mon was good and GST was good, while it was wrongly timed and not executed well. Government should have planned well to avoid the problems that it came across in implementing both these great reforms.”

We are the world’s biggest democracy having diversity of Africa to Europe in our mindset. When it comes to paying taxes we are like Africa, the most corrupt. There could not have been an opportunity to learn from some others mistake before bringing these two reforms. We should only learn from our own experiences. That is how it can be…..

There is an urgent need to move out of the comfort zone of protectionist mindset to accept reality & face the world as it is. It will strengthen us as a country and prepare us to have more luxuries.


10 Lakh Crores of Investor wealth lost after the Budget 2018. Really??

After the 2018 budget, the rising stock market went into correction mode. This long-awaited correction was triggered by the budget proposal to re-introduce Long-Term Capital Gains tax.

Media frenzy created fear and confusion in the minds of retail investors, resulting in panic selling. In parallel, global events like the Russian elections and Saudi Aramco IPO, the world’s largest IPO, supported the fall. Now crude oil prices need to stay at high levels for both these events to sail through. This worry took the markets further down, so more sell-off is likely.

Now the media says 10 lakh crores of investor wealth is lost in 5 days. This fuels the fears of the already confused investors. Is it true that so much wealth was actually lost? If so, who made the gains?

In the stock markets, when there is a higher value on a company’s stocks or the index, it is true that the whole asset is valued at that price. If all the owners offer to sell at the highest price, there is zero possibility that everyone will get that price. As sell offers pour in, supply increases and price declines. Price decline continues till the supply slows down and demand increases. Then the price starts to move up again. If the sentiment becomes stronger and builds more confidence, then the market moves past the previous high leading to an even higher value for the total asset.

Wealth gets created because of the confidence people have in the company or the economy. Wealth gets eroded when many of them conclude that their expectations are met and begin to move out.

So, only if we sell and move out of the investment can we lock the high price. If a person is waiting without participating in selling and realizing the gains, it means his confidence level is high, and he wants to achieve an even higher price.

Just calling out the highest level reached, not taking the action to exit and saying wealth is lost when prices move down does not have a meaning. The reason why you did not sell was that your confidence in the company or economy continues to be strong. If it remains strong, be invested to exit at a higher price.

The other approach is flawed wherein you stay invested when the market is moving up and when prices decline due to selling by others, you get worried and take a decision to sell at the available price. At this stage complaining that you lost your wealth is not the right way to approach this asset.

If you are participating in the stock market with commitment and confidence, hold on till suitable conditions prevail. If the situation changes and shakes your confidence, then take a stand to move out either with available profits or even at a loss. Again, you need to understand the conditions and take action.

In reality, wealth is not lost. It was only a notional value. When a group of investors decides to move out, the prices drop bringing down the notional value. At all times we will have some set of investors wanting to exit for various reasons and that is market dynamics.

Be invested as long as your confidence in the stock or the market is intact. Exit when your goal is reached, or the conditions change, altering your view and confidence levels. Once we are investing with this clarity, ups and downs in the market will not disturb us or make us take a decision midway to exit.

So, when markets come down in value, no one loses any physical money, it is only the notional value that comes down. Stay invested with your confidence and objective and you will get rewarded adequately.

LTCG Brings Selling Pressure To The Markets

Our markets have been waiting for a correction since long. The market is scaling peaks since April 2017 on the back of two truths –

  1. The strong flow of retail money coming into the markets
  2. Government intervention in every possible way to keep the positive mood in the market.

Now the much awaited Long-Term Capital Gains Tax (LTCG) coming back at 10% has triggered the sell buttons. In one way it is a sign of relief. Investors were haunted by fears that a correction will take away weak hands in the market and move out weaker stocks from managed portfolios. It is required once in a while to cleanse portfolios too. Like servicing our vehicles after periods of use, a review and cleaning help to put things in a condition to move on further.

The reaction to the LTCG tax is disturbing. The proposal to grandfather gains made till 31st Jan 2017 and tax the income from there off has driven many to think of immediately selling their long-term holdings before 31st March 2018 to claim tax exemption and then re-invest. These are actions that mature fund managers or fund houses would not take because they know that there is no benefit, and only adds more accounting effort.

Retail investors, thinking that they are smart, are going ahead with selling their holdings. Most of the times, after they sell, prices will drop further, and they will get comfortable with their decision, deciding to wait and get in at a better price later. Why they want to buy again? The stocks they hold are good ones, so they want to be invested. Only that, they do not want to pay tax on the gains.

The savings will be 10% of whatever gains they have made so far. While what will happen later is that, in the bargain to time the market, they will miss the next move and probably not buy again or take entry at higher levels. In both ways, they will only end up losing more, leaving the government and brokers with more income. And all these efforts are only possible for the next two months, after that, markets are going to be there, and there will be profits to be made, on which taxes must be paid.

Such kind of immature moves are the reasons why retail investors are always losers and professionals are consistently gainers.