Moneycontrol Pro Weekender: When markets laugh

Dear Reader,

You can’t keep a good market down. This week, the bears had some big guns with them. On Monday, the Economic Survey sounded the proverbial note of caution by pegging this year’s GDP growth at 6.5-7 percent, lower than RBI’s and the market’s estimates. It harped on the enormous difficulties of growth in a fast-changing and unpredictable global environment, lamented the disruption to jobs from AI and the difficulties of increasing capital spending and exports in today’s virulently geopolitical milieu. We called it a “strong dose of much-needed realism”.

For the markets, its warnings were crystal clear. Drawing attention to India’s market capitalisation to GDP ratio being far higher than that of other emerging market economies, it said, “The market capitalisation to GDP ratio is not necessarily a sign of economic advancement or sophistication… If equity market claims on the real economy are excessively high, it is a harbinger of market instability rather than market resilience.” It deplored the entry of large number of young retail traders into the derivatives markets and said, “The financialisation of economies has not ended well, even for advanced economies. The global financial crisis of 2008 is an obvious example. Developing countries face debilitating crises when financial market ‘innovations’ and growth run ahead of economic growth… Therefore, India needs to have an orderly and gradual evolution of the financial market.’’ The Survey added, “India can ill-afford the economy's over financialisation at its current development stage.’’ Those words could have come straight out of “The Thoughts of Xi Jinping”.

Tuesday brought the Union Budget, which turned out to be a remarkably tame affair. Total expenditure budgeted for FY25, compared to the “Provisional Actuals’’ for FY24 was up 8.5 percent, less than the 10.5 percent nominal GDP growth assumed for the current fiscal. Revenue expenditure minus interest payments was up a mere 4.8 percent, barely beating inflation. So much for a push to consumption. The fiscal deficit is projected to be lower this year, so there’s less of a fiscal stimulus, but note that the fall in the stimulus was much more in FY24 and yet we had 8.2 percent GDP growth. Gaurav Kapur, chief economist at IndusInd Bank, underlined that the Budget stayed the course on fiscal consolidation.

But the real story of the Union Budget was not the macro or even its focus on employment, but on the markets. The changes in the capital gains tax and the Securities Transaction Tax unnerved the market, albeit for a very brief while. As if on cue, SEBI came out with a study that said 71 percent of traders in the equity cash segment lose money. We wrote on this report here and here. It did seem as if the finance ministry was trying hard to send a not very subtle message -- it’s time to take some of the froth off the market. My colleague Nitin Agrawal wrote, “the reforms in Budget 2024 reflect a dual objective: promoting long-term investment across diverse asset classes and reducing the dominance of equities in investment portfolios”.

Did the equity market listen? It did sulk a bit and the angst among traders was palpable—our newsletter on Wednesday was headlined “SRF-- but they soon shrugged off the woes, laughing at all the pathetic talk of restraint. In Carl Sandburg’s words about Chicago:

“Laughing with white teeth,

Under the terrible burden of destiny laughing as a young man laughs,

Laughing even as an ignorant fighter laughs who has never lost a battle,

Bragging and laughing that under his wrist is the pulse, and under his ribs the heart of the people,

Laughing!

Laughing the stormy, husky, brawling laughter of Youth”

By the end of the week, the markets had reached a new high and the Vix had gone back to sleep.

You’ve probably been subjected to a barrage of reports on the Union Budget all week, so I won’t add to them, instead moving on quickly to the important topic of how you could profit from it. Our columnist Vijay Bhambwani took the bull by the horns, writing about strategies for traders to thrive in a higher STT regime. Chandu Nair focused on one of the Budget’s few bright spots—the removal of the angel tax—writing that it will “create a more conducive environment for investment and innovation, ultimately strengthening India's position as a global start-up hub”.

Our independent research team picked several stocks that would benefit from the Budget’s measures. These include Protean eGov Technologies, which will gain from the Budget’s digital push; CE Info Systems and Genesys International that would profit from the boost to land records management; a water treatment stock—Va Tech Wabag; housing finance stocks; Astra Zeneca, which benefits from the scrapping of customs duty on cancer drugs; stocks that benefit from the reduction in duty on leather imports; and this infrastructure stock.

On Wednesday, the Nasdaq dropped the most in 18 months, with the markets wondering how long the tech majors would have to wait to collect the payoff on their AI bets. The CME Fedwatch tool says there’s an 89 percent probability of the first rate cut being in September and more than 50 percent probability of three 25 basis point rate cuts by December. My colleague Vatsala Kamat wrote in this newsletter headlined “Nasdaq rout, a wake-up call?’’ that rate cuts benefit smaller companies more, “as some of them could have bigger debt burdens than large-cap ones. This perhaps exacerbated the fall in overheated tech stocks as investors took cognisance of a larger menu they could choose from”. Markets across the world felt the aftershocks of the Nasdaq fall, but not the irrepressible Indian markets.

Perhaps both the US and Indian markets reflect solid fundamentals. The Flash Purchasing Managers Index for India for July shows very strong growth momentum, albeit with higher selling price inflation.

For the US, the Flash PMI showed output accelerating in July, while prices rose at a slower rate. US GDP grew at a much-faster-than-expected 2.8 percent annualised rate in the second quarter of the year. Amazingly, these signs haven’t been able to dent the market’s hope of imminent rate cuts.

The markets are probably humming this old Beatles song:

“Nothing’s gonna change my world

Nothing’s gonna change my world

Jai guru deva’’

Cheers,

Manas Chakravarty

Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks

Axis Bank, Federal Bank, L&T, Weekly tactical pick, Tech Mahindra, Nestle India, KPIT, Jindal Steel & Power, Sona BLW, SRF, Mahindra Finance, JSW Steel, Wipro, HDFC Bank, Kotak Mahindra Bank, Indian Hotels, UltraTech, Dalmia Bharat, Polycab India, ICICI Lombard, Cyient DLM, Hindustan Unilever, Bajaj Finance, Ashok Leyland, Cyient, PG Electroplast

Markets

Does your heart beat for the customer, Sebi chief asks mutual fund distributors,

The Budget and the investment case for gold

Q1 results: Top 5 Indian IT companies strike optimistic note as North America market recovers

MC Market Poll: Tax hikes will not have any major impact, say experts

Financial Times

Funding surge for blank cheque companies points to Spac bounceback

Inflation, stock prices and French fries

Digital paralysis shows the dangers of e-globalisation

After Joe Biden, is there still a Trump trade?

Mohamed El-Erian: Why I am now optimistic that economies can break out of a rut

Taylor Swift and the fallacy plaguing modern economics

Companies & sectors

In its biggest acquisition, Mankind Pharma tries to replicate its past success in M&A, ICICI Prulife, How large IT companies stack up after June quarter, Bajaj Finance

Economy & Policy

The government has an AI conundrum at hand

India has a small bank problem and it needs to act soon

We need long-term budgeting to tackle climate change

Credit guarantees, forbearance have fuelled MSME credit

Pro Economic Tracker

Monsoon Watch

Decoding Economics: IMF paper maps India’s distance from the productivity frontier

Tech & Startups

The day the world’s computers went on strike

Geopolitics & Geoeconomics

The turmoil in Bangladesh

Personal Finance

ITR filing 2024: How tax harvesting can slash the tax payable, boost returns

How to invest when nothing is under your control