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In the run-up to Budget 2018, the market was worried about imposition of long term capital gains tax (LTCG) amid other things. However, the grandfathering provision that the finance minister introduced will make the overall impact on the market sentiment quite negligible. This is despite the fact that we are trading near all-time highs. If all the existing capital gains (till January 31, 2018) are grandfathered, then there is nothing much to worry about. That’s because when investors will buy stocks now, they will build in a 10% payout as LTCG in their return expectation. Therefore, I do not think LTCG is a big issue for the markets. The grandfathering clause for LTCG was a masterstroke and a deft move by the government. The market would have collapsed if this clause was missing.
Overall, I think it is a balanced budget. In the run-up to the event, people were worried about issues like rural distress, job creation. A number of businesses, including the farm business / sector, was under distress after demonetisation and implementation of the goods and services tax (GST). Budget 2018 seeks to address all these issues. Focus on agriculture and the launch of a flagship health insurance scheme that would cover over 100 million poor families and give up to 500,000 rupees ($7,860) in medical coverage for each family annually are positive moves that are focussed on the rural masses.
Going ahead, the markets will take cues from growth in corporate earnings. Barring a few companies, December was one of the best quarters as regards earnings. That said, public sector banks, pharma and information technology (IT) companies are still reeling under pressure. That said, earnings pick-up will become more broad-based. As long as earnings continue to remain supportive, there is no risk for a market collapse; it will just keep inching higher.
Given the tone of Budget 2018, I don’t think the government is in a mood to prepone the general elections, as was the buzz ahead of this event. By December 2018, I think investors can expect a 15 – 16 per cent upside in the markets from here on. There is been a run-up in the markets in the absence of earnings growth and unless the spike (in earnings) from here is dramatically high, the markets will continue to climb higher steadily.
U R Bhat is managing director at Dalton Capital Advisors. Views expressed are his own.
(As told to Puneet Wadhwa)