Ballots and bourses

It has been business as usual for the equity market in the week after the presentation of the final Budget of the Modi government. This indifference is justified. Besides the proposal to centralise the levy and collection of stamp duty on financial securities transactions, financial markets were largely ignored in the Interim Budget. The move to levy a uniform rate of stamp duty across the country and across all segments is a good one and will lead to cost savings for those trading in stock exchanges and also make compliance easier for intermediaries in financial markets. But equity market participants would probably be relieved that there were no unpleasant surprises this time around, akin to the tax on long-term capital gains on equity and equity mutual funds introduced last year.

With the Interim Budget behind, the stock market will turn its attention towards the general elections scheduled mid-year. Nervousness among market participants is already palpable. Foreign portfolio investors have been on the sidelines for the most part this calendar. Mutual funds have also been reluctant to invest heavily in stocks at these levels; domestic funds have been net sellers in equity market so far in 2019. With institutional investors turning cautious, it is not surprising that benchmark indices have been treading water. Market valuations, while lower compared to last January, are still not cheap. Earnings growth is also expected to moderate this year due to increasing commodity prices, poor rainfall in the rabi season impacting rural demand, stronger rupee, expectation of higher inflation and the cascading impact of the IL&FS issue. The positive for stocks at this juncture is the relatively benign global environment. The US Federal Reserve decided to pause the rate hike cycle at its last meeting and indicated a more patient approach towards future hikes. The decline in crude oil prices since last November also augurs well for the Indian currency as well as the economy.

In short, the drivers of the equity market are flashing mixed signals. But investors ought to take it easy as the general elections approach. As the interim Budget indicated, the government is likely to turn its attention towards wooing voters, relegating important issues such as investment in infrastructure, jobs, skill training and so on to the back-burner. Government spending will increasingly be channelled towards revenue expenditure, stalling long-term asset creation. Besides, stock market too tends to grow volatile around Lok Sabha elections. Empirical data show that shaky coalition governments cause short-term instability in equity market. It would be best if investors remain aware of the short-term risks at this juncture and adopt a cautious strategy. The market regulator too needs to educate investors about the risks in direct investments in such market conditions. Besides this, SEBI should increase its surveillance of trading in stocks and derivatives around the election time to check miscreants from exacerbating market volatility as was witnessed in May 2004.

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