Stimulus welcome: but market will continue to be excessively volatile

Finance Minister Nirmala Sitaraman has to be appreciated for presenting a fiscal stimulus package within the limits of fiscal prudence. A budget proposal that negatively impacted the market, and led to capital flight from India, was the imposition of the super-rich surcharge on some categories of FPIs also. This has been withdrawn. For the crisis-ridden automobile sector many stimulus measures have been announced. These include: Assurance that the new BS 4 vehicles to be purchased before March 31^st 2020 will have validity for their entire registration period, additional 15 % depreciation for vehicles, postponement of the proposed higher registration charges till June 2020 and removal of restrictions on purchase of new vehicles for government offices. These measures are sentiment positive and will have beneficial impact on vehicle demand.

In spite of the 4 rate cuts by the RBI, the rate cuts have been passed on to borrowers only partially. The proposed linking of some new loans to the repo rate can bring borrowing rates down for the retail borrowers. GST refunds to MSMEs in 30 days and removal of ‘Angel Tax’ on registered start-ups are welcome measures. The best thing about the stimulus initiatives is the government’s willingness to listen to experts and industry and take corrective steps.

Wanted: more confidence-building measures

It is a fact that business confidence has been seriously impacted and animal spirits have taken a big knock. Risk-aversion has gripped business. Policy mis-steps like the higher surcharge on FPIs, witch-hunting of bankers and harassment of businessmen by over-zealous bureaucrats and tax personnel have all contributed to the erosion of business confidence. Confidence restoring communication from the Prime Minister himself through his Independence Day Speech and now this stimulus package from the FM are reassuring. The economy needs more confidence building measures to encourage risk-taking and kindling “animal spirits.”

More reforms to come, but the global economy is weakening

The FM has made it clear that more reforms will be announced in two stages in the coming weeks, one exclusively for the housing/real estate sector. This is sentiment positive. Optimism regarding the coming reforms is likely to impart some strength to the market.  But the global economic situation has turned highly dynamic and global markets excessively volatile. The worsening of the trade skirmishes between US and China is impacting global markets. If the trade skirmishes aggravate into a trade war the global economy may even slip into recession by the end of the year. Global economy is weakening and there are very few bright spots. IMF chief economist Gita Gopinath said recently that “as the year progresses bright spots are difficult to find.” Weakening global economy will continue to be a drag on global markets even while the accommodative monetary stance and abundant liquidity globally will continue to be supportive.

Market will continue to be excessively volatile; stick to quality

We are living in a world in which a ‘Trump tweet’ can impact global markets. In this dynamic world of high uncertainty and market volatility investors should stick to quality. Even if the market turns bearish good quality stocks -both in the large-cap and mid-cap space- with earnings visibility will continue to be resilient. This market is just perfect for SIPs. Investors with a three to four year time horizon may even make lump sum investment in mid and small-cap funds.

Posted: August 2019.