India’s Budget on 1 February was remarkable because it was low-key, matter-of-fact, and did not spring any unexpected populist surprises. Presumably, there was no room for spending on infrastructure and capital goods, so the honorable Finance Minister Nirmala Sitharaman reduced the Income tax burden on taxpayers.
Your tax outgo will be nil if you earn around Rs. 12 lac p.a. Overall, the government has foregone about Rs. 1 lac crore of revenue and given it back to the people with saved taxes to spend or save as they think fit. As things go, the tax-paying citizens are happy with this sizeable, unexpected bounty. They would be making plans on how to spend the extra cash.
Unfortunately, what the Finance Minister giveth, the market taketh away. Equity markets have been tanking daily on the back of foreign institutional investors selling. India is uncool, and they are getting out. The value of our equity portfolio is tanking, and how. With Donald Trump’s election win, the US believes their country will beat all odds and be the supremo. The US is mighty, and with Trump at the helm, it is not scared to pull any punches.
As we wrote in our earlier blogs, the market fall is also caused by India‘s faltering GDP growth. Hopefully, some readers booked profits or at least did not invest at high prices; the market seemed to have run ahead of itself.
As soon as he was sworn in, as promised, Trump fired salvo after salvo on immigration and Tariffs. He uses tariffs as a negotiation tool to get a better deal from other countries. There is no pretense of anything else; business is the only consideration.
The world is scrambling as Trump upsets delicate trade balances and the interconnected supply chain. The US President comfortably backtracks when he misfires and is not embarrassed to do so. His moves are hard to predict, keeping everyone on the back foot.
To deal with the Trump menace, alliances are being sought, and unlikely friends who are sworn enemies are being made. However, a strategy to deal with Trump will take some time.
Meanwhile, foreign investors are withdrawing assets from our country and investing in the USA. No wonder our INR is falling. It has touched close to Rs 88 to a dollar and retraced.
We can take heart from the fact that India is pretty stable. Our Current Account deficit is low, our Fiscal Deficit is in control, and inflation is not out of control. Our growth, which was at an eye-popping 8% +, has now slowed to 6-6.5%, which is nothing to be scoffed at.
So, the way to look at the situation is that the strength of the USA is driving the markets instead of the weakness in our markets. The past runaway rally in the equity markets, which has driven valuation up, is the only factor against us.
With the Dollar appreciating and earnings slowing down, foreigners are grabbing the profits and running while they can. It is not as if they have suddenly started hating India. India is slowing, and the INR is depreciating, so they get fewer dollars back for every rupee of return. They are taking their money back and investing in geographies where they feel the return will be higher.
Young investors who haven’t seen a bear market might get spooked by the carnage in equities. Markets are unforgiving and can seem irrational. Stocks that were yesteryear’s darlings can become taboo, and no one will touch them.
In any case, this stock market correction is par for the course; it was just that it took a long time to come. This will be a good time for investors to understand their risk tolerance and develop resilience. The Trump regime has just begun. Executive orders are flying fast and furious; there will be pushback and countermeasures so that things may calm down a little. That is the hope. Otherwise, you have two choices: jump off the rollercoaster, get bruised & walk off, or tighten your seat belt and enjoy the ride.
How does one navigate portfolios in this tricky situation? If you have followed asset allocation, you can sit tight without worry, as you are well insulated. If not, the bleeding market will surely sour your mood.
Where do you invest in these moody markets if you have a surplus? It is hard to recommend pure equities without a very long holding capacity. If you all wish to plunge into equities, then very slow systematic investment plans in large or flexicap would be preferred.
Gold has risen significantly and is trading close to Rs 85000 for 10 gms 22/24 carats. Large investors turn to gold for protection when there is uncertainty. Gold may increase further if the INR keeps depreciating and if the market turbulence continues. So, a measured investment may be considered while keeping in mind the high price already.
My preferred choices here are good-quality fixed-income funds, fixed deposits, and AAA-rated Bonds. Although debt mfs and FDs are not tax efficient, as they are fully taxed at the slab on gains and income, I would protect my principal and gain some clarity before taking a risk. (Capital Gains on listed bonds are taxed at 10% without indexation.) Here, our goal is to protect the principal and not gain from an increase in the bond price. You can read about debt mutual funds here. I prefer low-duration, money market, or short-term plans in the current scenario.
Or you can chill, park your money in liquid or money market funds, and wait for opportunities. Cash is king; the environment is not easy anymore, and you’ll have to work to earn a return.
Rupal Shah
Very well explained and simplified.Thankyou
Amita
Thankyou Rupal.