The domestic equity market slumped on Monday as markets fell for a second consecutive day, triggered by certain proposals made in the Union Budget that disappointed investors.
Key benchmark indices witnessed a sharp intra-day fall. S&P BSE Sensex, which opened lower, tanked by 907.91 points. By the end of the day, the index recovered slightly and ended lower 792.82 points, about 2%, at 38720.57. NSE Nifty 50 also closed 252.55 points down, at 11558.60.
Budget proposals of higher taxes on high income generating groups, increase of minimum public shareholding from 25% to 35%, and the buyback tax of 20% with no concrete roadmap to boost the economy dampened investment sentiments. Besides, weak global cues and anticipation of another weak to muted quarter earnings dragged the domestic markets down. In two days, investors have lost around Rs 5.61 lakh crore in market capitalisation.
Global markets were weak on Monday after US investment bank Morgan Stanley downgraded its allocation to global equities to the lowest in five years and said the outlook for stocks looks poor over the next three months.
In its July 7 report, Morgan Stanley said, "Our concern is that the positives of easier policy will be offset by the negatives of weaker growth.
"We think a repeated lesson for stocks over the last 30 years has been that when easier policy collides with weaker growth, the latter usually matters more for returns. Easing has worked best when accompanied by improving data."
"Over recent weeks, you've heard us discussing why we think investors should fade the optimism from the recent G20. Why we think bad data should be feared rather than cheered because it will bring more central bank easing. Why we think the market is too optimistic on 2019 earnings and is underestimating the pressure from inventories, labour costs and trade uncertainty. The time has come to put our money where our mouth is. In light of these concerns and others, we are downgrading our allocation to global equities from equal-weight to underweight," it said in the report.
Of the 30-stock Sensex, YES Bank (5.56%), HCL Technologies (2.15%) and Tata Consultancy Services (0.67%) only ended in green. Sensex was dragged by realty, auto, power, finance stocks during Monday's trade, with the major losers being Bajaj Finance, ONGC, HeroMoto Corp, Maruti Suzuki, NTPC, and L&T.
Of the 11 sectoral gauges on NSE, all ended in red, led by PSU Banks (-5.90%), Nifty Realty (-3.49%), Nifty Auto (-3.26%), Nifty Media (-3.26%), Nifty Financial Services (-2.90%) and Nifty Bank (-2.77%).
Amar Ambani, president & research head, YES Securities, said, "The market fall was on account of concerns over future fund flow into the secondary market and scam revelation at Punjab National Bank."
According to him, hike in surcharge in the Budget will have an adverse impact on high-end consumption, as well as reduce the investible surplus of high-income individuals, whose money was the mainstay of mutual funds, PMSes and the midcap segment.
"The increased surcharge also has a bearing on FPIs coming in through the Trust route and taxation of Cat-3 AIFs. This potentially reduces the post-tax attractiveness of India, vis-à-vis other markets, where such a high rate doesn't exist," he said.
Fears around the squeeze in secondary market liquidity is also due to proposed higher public shareholding norms. Fears of a prolonged slowdown in consumption also caused sell-off in autos and NBFCs, linked to consumption story, he further added.
Equity markets were expecting some kind of fiscal stimulus from the Budget but there has been a big disappointment, said Rusmik Oza, head of research, Kotak Securities.
According to him, housing is the only segment to get some kind of stimulus. The budget, however, has been taken positively by the bond market due to the curtailment of the fiscal deficit.
"We find the nominal GDP growth assumption of 12% for FY20 Budget estimate to be very high considering the fact that the current nominal GDP growth rate is less than 10%. Key changes announced for capital markets like increase in public holding and tax on buybacks have been taken negatively by the market. Recapitalisation of banks will be equity dilutive if done below book value and higher PSU disinvestment would mean more supply of PSU paper. The bigger worry for markets is the forthcoming earnings season," Oza said.
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"We think a repeated lesson for stocks over the last 30 years has been that when easier policy collides with weaker growth, the latter usually matters more for returns. Easing has worked best when accompanied by improving data."
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