Markets have been seeing a bloodbath over the past few weeks, with the last few trading sessions only getting worse. On Friday (July 19), the Sensex slumped over 560 points. In its next session on Monday (July 22), it shed over 305 points to close at 38,031.13, while on Tuesday it closed even lower going below the 38,000 mark at 37,982.74. This marked three consecutive days of the market downfall.
From a market capitalisation of Rs 151.35 lakh crore as of July 5, when the budget was announced, the market capitalisation of all BSE listed stocks stands at Rs 144.55 lakh crore. This means that Rs 6.8 lakh crore of investor wealth was wiped out since then.
From a slowing economy to a disappointing budget, there are several factors causing this downfall.
Economic slowdown
According to market expert Ajay Bagga, there is a combination of a slowdown in the economy and a fear that corporate earnings too will slow down, leading to lower valuations. “Markets always tend to act ahead of an event, so we are seeing a lack of confidence because of lack of growth in the economy,” he says.
Moreover, stocks have been crashing daily. And market expert Ambareesh Baliga says that in such a scenario, even those willing to put in fresh bucks into the market will want to wait and watch. “Who will want to invest and then lose 20-30%? Psychologically, you would prefer to wait,” he adds.
However, Ambareesh says that corporate results were anyway expected to be muted and hence weren’t a surprise to investors. However, while they may not be pushing the markets, they aren’t supporting them either.
Disappointing budget
However, the bigger disappointment has been the lack of enough pro-growth measures in the budget.
In anticipation of Modi 2.0, the markets rallied reaching new heights on both the Sensex and Nifty. This was because investors, apart from cheering continuity in policies, also expected to see an impetus being given to the economy in the budget. This was crucial to kickstart the economy and improve consumer sentiment.
However, the budget, Aja says, disappointed the markets as there were no specific pro-growth measures that could lead to growth, which was the need of the hour.
In fact, ace investor Porinju Veliyath, known to make expert market bets also said in a recent note to his investors that he was disappointed with some of the provisions announced in the budget, especially from a long-term stock market perspective.
“While the monetary impact of these changes is minimal, the message it gives to the larger investment community is rather regressive. Intentions of the present government without doubt have been good and their efficiency in utilizing tax revenues has been excellent, but these factors aside, it seems that policy makers are not acknowledging the cardinal principles of a free market economy,” he wrote in his letter.
Super-rich tax
In the budget, Finance Minister Nirmala Sitharaman increased the tax surcharge on super-rich tax-payers who earn more than Rs 2 crore a year. Along with this, foreign investors who aren’t registered as corporate entities (called individuals and association of persons) were also included in this surcharge. If they now earn more than Rs 2 crore a year, they too will be subject to the increased surcharge.
Ambareesh says that this tax, which can go up to 42%, made foreign investors feel like they aren’t welcomed in the country. “Out of nearly Rs 30 lakh crore of foreign investments in the stock market, roughly 40% is in the non-corporate format, which led to a sentiment hit. Globally, they face very little tax on capital market investments and our taxes are among the highest in the world. And that could lead to money going out of India into other countries,” he adds.
Not surprisingly, Foreign portfolio investors (FPIs) pulled out Rs 8,796 crore in the month of July as of Monday.
Opportunity for investors?
Ajay says that this fall in markets is actually an opportunity for investors going by the fact that the economy will grow going ahead.
Ambareesh too, echoes the same sentiment. He advises investors to stay invested and keep investing in small amounts. “We are taking several bitter pills at this point but once all these measures get digested, India’s growth will come back,” he says.
“This is a great opportunity, though it will come with a lot of pain. You should be willing to see the pain of your portfolio depleting. But valuations look good. You just need a lot of patience. It’s a good time to invest,” Ajay adds.
Both Ajay and Ambareesh are upbeat about the prospects of the economy going ahead and say that it will take at least another six months before markets begin to bounce back.
“RBI rate cuts, etc. will have impact over time plus the government sector spending at the bottom of the pyramid will eventually bring back demand. We have to wait for the stimulus now. There is money in the market to invest, but people are on the sidelines waiting and watching. As economy shows signs of recovery, you will see money returning,” Ambareesh adds.
Overall, despite the current bloodbath in the markets, experts are not pessimistic. They expect to see a much better market than now by the end of this year and advise retail investors to stay invested.