Other factors that can affect the market

5 JUNE 2010

As if worries about Europe's economy and North Koreas recalcitrance weren't enough, there are some other factors investors must consider, that could negatively affect the market. The new tax code is doing away with the distinction between long and short term capital gains. This means that long term gains, for holding over a year, will, from April 1, be taxable, at marginal tax rates. They are now free of tax. If this proposal is passed by Parliament, it would lead to a flurry of selling because the rational response would be to sell and buy back to claim the tax free gain and to increase the cost of the new purchase. One recalls that at the time of introducing the securities transaction tax, over which there was a furore, the then Finance Minister gave, as a sop, the benefit of tax free long term gains. Now that the STT is accepted, the sop is being withdrawn. This is dishonest and not in the realm of sound fiscal policy. Mr Mukherjee, if you wish to tax long term gains, please also simultaneously remove the STT.

--------------------- Don't Miss! FREE Webinar with Ajit Dayal - Register Now! ---------------------
If you are worried about the global crisis reaching India and impacting your investments, then tune in to the Equitymaster FREE Webinar, titled, 'Global Fears, India Cheers?' Listen to Ajit speak on the opportunity he can foresee for India...and for a long-term investor like yourself. Scheduled for Monday, 7th June, 5.30 pm (IST).
Hurry! Register now!

Another change mandated is to compel companies to offer 25% of their holding to the public. There are many companies which have a smaller free float. In the public sector, companies like MMTC, NMDC, Power Grid, SAIL, and others and in the private sector, Wipro, DLF, Reliance Power and others have free floats less than 25%. These companies would hit the IPO market, resources for investing in which would be pulled away from secondary markets.

The Indian economy is doing well and so is the Indian corporate sector. India's GDP grew 7.4% in 2009-10 (thanks to an 8.7% GDP growth in Q4 ended March 2010) better than most global economies, many of whom are still in serious trouble. GDP growth for 2010-11 is expected to be at 8.5%, quite achievable with the industrial and services sectors doing well and with an expected normal monsoon aiding agricultural growth. The top 25 industrial houses showed a 17.4% increase in net profits, commendable in the context of the global slowdown. The Government is taking some steps towards structural correction; it is set to increase prices of petrol by Rs 3/litre next week, something that will help cut the fiscal deficit and is long overdue. In order to have a fairer discovery of the price of natural gas, it is permitting new discoveries to be sold at market prices.

In corporate news, R Com and MTN are to reopen talks about a merger. The last time talks were held, the basis was that Anil Ambani would sell his stake in R Com in exchange for a 35% stake in MTN, which would make him the largest shareholder in the combined company. After the drop in the market price, this may perhaps be lower.

NTPC is to buy an Australian coal company for $1 - 1.5b.

The news from abroad continues to be worrisome. The UK, Italy and Germany have announced austerity measures to cut public spending and France is to follow suit. The US economic recovery is slower than expected. It added only 41,000 private sector jobs in May, shaking investor confidence. The Labour Department had stated that non farm payroll grew by 431,000 but of this, 411,000 were hired by the Government for the national census. The chart below, from shows that the pick up in non farm employment in the US is below the regression line.

Last week the BSE-Sensex gained 254 points to end at 17,117 with SBI, Infosys and ONGC contributing 106 of those. The NSE-Nifty gained 69 points to end at 5135.

The Sensex will meet resistance at 17,500 and then at 18,000 which it is unlikely to pierce at the moment. After Friday's close, the western markets dipped, with the Dow falling 3.1% and the FTSE by 1.6%. It is possible that we may open weak on Monday but if it ignores those cues, the rally could continue till, at best 18,000.

Not only is Europe faltering and the US recovery feeble, but China's property asset bubble is likely to be pricked. Mindful of this, the Government has already tightened mortgage lending. Mortgage lending in China is 15% of GDP; it grew by 53% last year. However, this is well below the peak of 79% in the US, before the crisis. Home prices in Beijing have risen too high; a 100 metre square home now requires 17 years' income to buy. The pricking of the property asset bubble would slow China's growth but would not seriously impact its banking system because the loans are about half the current value of the homes.

The Indian story thus looks like a beacon in comparison to others. However, when another crisis occurs, as it will, the flight to safety would provide opportunities to buy. For the moment it is a trader's market not an investor's one.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

Equitymaster requests your view! Post a comment on "Other factors that can affect the market". Click here!

3 Responses to "Other factors that can affect the market"

vinod chandna

Jun 7, 2010

Yes'today Punj Lloyd is on right rate.


agarwal mukesh

Jun 6, 2010

Yes,it is but natural that with the likely re-introduction of long term capital gains tax,everybody sitting on long term gains would like to book them before the introduction of Direct Tax Code which will put considerable pressure on the market in the short term.But the longer term worry would be the behaviour of FII's after the introduction of Direct Tax Code because Direct Tax Code is likely to supercede the Double Taxation Avoidance Treaties which India has signed with various countries and under which most of the FII money is presently coming to India which ensures that presently FII's don't pay practically any tax and which makes India an attractive destination for FII's.However,after the introduction of Direct Tax Code,FII's may have to pay tax at very high rates because as per Direct Tax Code,any capital gain is likely to be treated as your income only and is likely to be taxed as per your tax slab;which will make India very unattractive for FII's and which may keep Indian Stock Markets depressed for considerably long time.
Furthermore,such a change in taxation policies,will also be a disincentive for even Indian Investors.It is surprising that although till now Indian Govt was practically offering free lunches to FII's by not taxing FII's coming through Mauritious etc(most of FII money was coming through such routes only);however;all of sudden Indian Govt wants to tax them as well as Indian Investors at such high rates i.e. applicable income tax rates instead of any capital gains tax which was 10% earlier(for long term).
Actually,capital gains tax is a double taxation;at least for Indian Investors because capital gain is a capital appreciation on investments made and income through which investments were made;has already been taxed once. Therefore,there is no logic behind taxing capital gains at such high levels as applicable income tax rates.Furthermore,Securities Transaction Tax(STT) was introduced in lieu of long term capital gains tax when long term capital gains tax was abolished and STT had yielded the desired results.The govt got far higher revenue in the form of STT than what govt used to get in the form of long term capital gains tax.Therefore;taxing long term as well as short term capital gains as income would be a regressive step even if the govt scraps STT and would lead to lower revenues to govt in the long run because it will keep Indian Stock Markets depressed for longer period entailing hardly any capital gains to be taxed.Furthermore,it can endanger the economic growth of Indian economy in the long term because Indian Corporates would find it extremely difficult to raise money from Indian Stock Markets in depressed market conditions which will further lower revenue collection of Indian Govt.
Therefore,taxing long term & short term capital gains as income ;as is being talked about in Direct Tax Code;will not only be regressive but it will cost Indian Stock Markets,Indian Economy as a whole as-well-as Indian Govt very dearly and should be opposed tooth & nail by everybody.


Dr G.R.Kane

Jun 5, 2010

Dear Sir,
I wish to know if it is worth buying Punj Lloyd shares at the present price

Equitymaster requests your view! Post a comment on "Other factors that can affect the market". Click here!