Budget 2019 impact: Bearish trend likely to continue in stock market

In terms of major sectors, banking, financial services and FMCG were marginally positive after the Budget announcement, while the other major sectors saw losses

The market reaction to the Budget was negative. The sell off was widespread with most major sector seeing losses. Advances (467) were outnumbered 3:1 by declines (1317). The F&O segment saw 21 advances versus 138 declines. The negatives as perceived by the market seemed to be the following. Higher customs duties will mean rising input costs for many manufacturers. The indication that the government may ask Sebi to mandate a minimum 35 per cent shareholding for listed companies also impacted closely-held firms since this would mean a spate of offers that lead to an overhang of supply.

In addition, higher excise on fuels is seen as inflationary, while the tax on high cash transactions will impact some corporates as well. Investors were also disappointed with the fact that the Budget did not extend the benefit of a lower corporate tax rate to firms with turnover of more than Rs 400 crore.

The market sell off was a little more pronounced for smaller stocks. In terms of effect by investor group, the FPIs were marginally net-positive while domestic institutions were also marginally positive and retail by implication was net-negative.

In terms of major sectors, banking, financial services and FMCG were marginally positive, while the other major sectors saw losses. The best performer was the Nifty FMCG sector index, which was up by just 0.28 per cent, while the worst affected was the Nifty Metals Index (down 3.76 per cent).

On the positive side, the bond market does seem to expect rates to come down, at least slightly, since yields on government paper declined. This was due to the commitment that the fiscal deficit will be held at 3.3 per cent of GDP. However, this commitment to holding the fiscal target could be an optical illusion since it depends on assumptions of very high growth in tax collections (over 22 per cent), strong bidding at spectrum auctions, high disinvestment and also off-budget accounting.

The continuing recap of PSU banks and the creation of a backstop in terms of credit guarantees for Rs 1 trillion worth of NBFC assets is another sign that the government would like to encourage more credit flows to the NBFC sector. This was the underlying reason for the banking and financials segment to hold its ground. These stocks, along with consumer stocks, could be the best defensive value if the downtrend does continue.

Technically speaking, the index losses in the session were too large to ignore, while being too small to trigger an obvious change in trends. However, the breadth indicators, with the poor advance-decline ratio along with the high volumes inevitable on Budget session, suggest continuing bearishness. There’s strong support at 11,500-11,600. If that’s broken, the next strong support is between 11,100-11,200. That’s a critical zone since the confirmatory indicator for a big bear market is the 200 day moving average, which is also trading between 11,100-11,200.