Budget 2018 dampened market sentiment with bears tightening their grip on Dalal Street. Frontline indices fell more than 1.5 percent Friday and the broader markets crashed over 4 percent while on the sectoral front, Nifty Bank lost more than 500 points.
Major worry in market is the correction in midcaps that started even before the Budget and continued today with volumes on the buy side shrinking. Margin calls triggered in the morning led to sell-off in frontline stocks as well.
More than long term capital gains (LTCG) tax of 10 percent reintroduced in the Budget, introduction of a tax on distributed income by equity oriented mutual fund at the rate of 10 percent bothered investors, experts suggest.
A likely compression of price earnings, and hike in interest rates that may hit margin and finance cost for companies with debt on books also hit sentiment.
"One can ascribe this fall to LTCG, revenue deficit shortfall, political uncertainty as people get worried post Rajasthan bypolls where BJP lost the game," Ajay Srivastava of Dimensions Corporate Financial Services told CNBC-TV18.
"All in all the government is facing biggest headwinds and people are saying that true cost of demonetisation is coming to the fore. The government has no revenues to meet its political goals, which all I think bothering most to investors who are saying will this continue like this."
In this market, he said apart from economic uncertainties, political issues will also come to the fore and will become more relevant. Srivastava was thinking of happening somewhere in June-July, but it is happening now.
"MF inflows which were guaranteed with 10 percent distribution tax and were giving dividend every month, it was tax free, but now suddenly everyone is sitting with tax authorities. Now what is bothering investors is will this investment flow keep coming to MFs as now there are large segments go under tax hammer compared to earlier set up. It is not about paying tax but dealing with the tax. So all in all LTCG is not hurting sentiment but 10 percent tax on mutual funds is bothering most to investors now," he explained the major reason of worry.
Dipan Mehta, Member BSE & NSE said in an interview to CNBC-TV18 that more than LTCG, the fear in the market is about likely rise in interest rates and the process of compression of price earnings multiples but there is not threat to earnings and earnings remain intact.
Prior to Budget, market was factoring stable interest and justifying higher PE multiples, that equation may be turnaround completely, we are seeing that may be equity may not be the best asset class and we may get decent returns in fixed income as well.
On the whole, the companies which have huge debt on books wil have pressure on interest rates and margins, Mehta said.
Hemang Jani, Head Equity Sales & Advisory, Sharekhan feels the broad market is reacting negatively to the excessive focus on rural and social schemes and the return of LTCG tax.
There is stock specific pressure due to unwinding of positions in high beta stocks and the market will take few days to absorb these proposals, he said.
Srivastava feels the midcap crisis should get stabilised soon. People can hold on to stocks, don't sell out at this point of time, he advised.
Technical analysts expect this correction to continue and advised not to take long positions.
"This is a big correction and chances are that this correction will continue, getting worse. Bank Nifty already fell around 500 points, so this is going to get worse as more and more stoplosses coming, who is selling? - shortsellers as well as people are cutting down their long positions," Ashwani Gujral of ashwanigujral.com said.
He expects the big fall for 2-3 weeks. I won't be surprised if the Nifty breaks 10,400 level on the downside, he said.
Let the market gets settled and then think of taking positions in the market, he advised.
Mitessh Thakkar of miteshthacker.com said don't be hurry to buy stocks now. The Nifty may revisit its support levels of 10,550-10,590, he feels.
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