Capturing investor psychology - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Capturing investor psychology A  A  A

14 AUGUST 2009

Stockmarkets move on so many multitudinous factors that it becomes impossible to gauge which set of them control investor psychology. Right now, amongst the bullish factors is the fact that India remains one of the few global economies showing a healthy GDP growth; despite a monsoon failure with the consequent impact on agricultural production, we expect GDP to grow by over 6% this year. Other positive news flow last week was the increase in June IIP (index of industrial production) which grew 7.8% in June, much higher on both month on month and year on year comparisions. Direct tax collections are modestly up at 3.2%, in the first 4 months of the year. Car sales are up 12% in 20 cities, partly driven by the Government policies in other countries. Countries like US, Germany, UK, Spain etc. have programmes called 'cash for clunkers' wherein they give their citizens a monetary incentive to trade in gas guzzling clunkers for fuel efficient cars. The demand for fuel efficient cars, of the types produced in India, is boosting car sales.

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On Thursday, the sensex made a just under 500 point gain, enthused by a new tax code that would be put in place next year. On the face of it, it promises to reduce income tax liability for individuals significantly, by altering the tax slabs. The highest rate of income tax of 30% would be applicable for an income over Rs 25 lacs. Corporate tax would also be at a maximum of 25%, one of the world's lowest. All this is for the good. Indian bureaucrats, (break the word up and you c rats in a bureau!) are famous for inserting nettlesome barbs in the details. Thus capital gains would be subject to tax at 30% unlike now where short term gains (under one year) are 10% and long term gains are exempt.

One hopes that the Finance Minister is pragmatic and seeks to incentivise his voters, and honest tax payers, by not having senseless clauses put in. There is a small, but very influential, segment of society that completely evades taxes under the garb of 'agricultural income'. If Prime Minister Manmohan Singh wishes to leave a legacy generations will remember him fondly by, it would be to call this bluff and tax the larger farmers. There is no reason why a farmer having an income of over Rs 25 lacs should not also pay tax at the same rate, unless it is to allow corruption to thrive under the label of helping the poor farmer. Were that to happen, it would be a really bullish signal.

Infrastructure spending is going to boost demand; the Ministry of Roads, Transport and Highways plans to spend $ 70b. (Rs 350,000 crores) on roads.

Globally, too, confidence is returning; the MSCI global confidence index is up from 39.1 to 58.1. The US is likely to come out of recession by Q3, and countries like Germany are also bouncing back.

The bad news is the impact on the country of poor monsoon (the deficit was 56% as on Aug 12) and the swine flu, which is leading to closure of public places (cinema halls, malls, hill stations like Mahabaleshwar) which impacts commerce and hence economic growth. The monsoon deficit is more pronounced in states which have irrigation, but that is leading to a drop in ground water (alarming) and a surge in electric consumption to pump out the water (it nearly caused a nationwide blackout). Should there be a large scale failure, there would be a horrendous scale of human suffering. The Government may then impose a drought surcharge, which would become, for stockmarkets, a bearish trigger.

Investors would also look at clarity in, and stability of, Government policy. NELP (new exploration licensing policy) round VIII has been launched, with the highest number of blocks, at 70, on offer, but has reportedly not received a very satisfactory response so far. It has been relaunched on Aug 8. The reason is the tangle which the Government has got into, viz. if the contractor who wins the bid, has the freedom to price and market the gas or whether the Government, which has claimed ownership of gas as a natural resource, has it. Ashok Desai wants the Prime Minister to look into this in an article in the Telegraph.

Then again, on the positive side, investors' risk appetite has returned. The NHPC IPO was oversubscribed 23 times. Oil India is set to hit the market. The Government will divest an 8.38% stake in NMDC, with a subsequent, follow on offer by the company next year. IIFCL plans to raise $500 m. through its overseas subsidiary, to help finance import of capital goods for infrastructure development. Tata Motors plans on a Rs 8000 crore capex programme after having secured bank funding (not UK Government) for sustaining operations at Jaguar Land Rover.

Last week the BSE-Sensex ended at 15411, up 251, thanks entirely to a 498 point surge on Thursday, when the new tax code was announced which would, on a fleeting glance, incentivise people to work harder. The tax department, however, like a barracuda, is unwilling to give away anything, and would tax the wealth created because of the harder work. As someone has rightly pointed out about the US tax authority, the IRS (Internal Revenue Service), if one puts 'the' and 'irs' together, it becomes theirs! Its the same with Indian tax authorities. The NSE-Nifty ended up 98, at 4580.

The sensex is tantalisingly close to breaching the resistance level of 15,750. A convincing breach (normatively by 3%) of this would be the equivalent of waving a red flag at a crazed bull. Will the investor psychology change soon enough for this to happen?

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.

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4 Responses to "Capturing investor psychology"
Radhakrishna Rao
Sep 28, 2009
Dear Mulraj

Proposed tax code does not distinguish between the Employee who is not eligible to claim depreciation on personal vehicle and other businessman, Professionals.who are eligible. Previously Standard Deduction mitigated this anomaly.

No additional incentive for Savings come under pension etc.
Aug 26, 2009
Dear Mr. Mulraj,
Thanks for looking into the comment.
The piece now says:
"unlike now where short term gains (under one year) are 10% and long term gains are exempt."
As I understand, from FY08-09 (AY09-10) onwards, STCG on stocks have been raised from 10% to 15% - courtesy P.C. - let me know if I'm mistaken in this regard.
Regards, Param
J Mulraj
Aug 18, 2009
yes Param you are was a mistake. thanks Like 
Aug 17, 2009
You said "unlike now where short term gains (under one year) are exempt and long term taxed at 10%." - I take it you are refering to equity here. I think it should be worded as "unlike now where short term gains (under one year) are taxed at 15% and long term gains are exempt." Perhaps a proof-reading error - or something I missed out... Please check. Like 
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