Budget 2024: Indian markets witnessed significant volatility as investors reacted to the budget announcements, particularly the changes in capital gains tax. The market was evidently shocked as participants digested these changes. However, the benchmarks recovered to end the day on a flat note.
The Sensex dropped 73 points to close at 80,429.04, while the Nifty lost 30 points, settling at 24,479.05. Earlier in the day, the Sensex had plunged 1,204.72 points to a low of 79,224.32, and the Nifty had crashed 405 points to 24,074.2.
"Domestic investors had high expectations from the budget to increasing revenue and capital expenditure. However, the narrative is mixed, by curtailing expenditure while attaining fiscal prudence, which can limit further growth. During the year, the market has fairly factored in ongoing growth and trading at a high premium. To sustain that gap, corporate growth has to be maintained, which is experiencing a slowdown as per the ongoing Q1 result," said Vinod Nair, Head of Research, Geojit Financial Services.
The seventh budget presented by Finance Minister Nirmala Sitharaman focused on job creation, rural development, women empowerment, and changes to the new income tax regime and capital gains taxes. Key changes included doubling the STT rate on equity and index trades, increasing the Long Term Capital Gains (LTCG) tax from 10 percent to 12.5 percent, and raising the Short Term Capital Gains (STCG) tax from 15 percent to 20 percent. Additionally, the income received from share buybacks will now be taxed in the hands of the recipient, a departure from the previous exemption.
Sector-wise, FMCG and IT displayed notable resilience, while realty, metals, and banking faced pressure. The broader indices also underperformed, declining between 0.6% and 0.9%. Given the volatility, we advise maintaining a cautious stance. It’s crucial for Nifty to sustain above the 24,200 level to keep a positive outlook; otherwise, profit-taking may intensify. Traders should adopt a hedged approach and favor defensive sectors such as FMCG, pharma, and IT for long trades. Conversely, avoid adding to positions in overbought themes like defence, railways, and select PSUs, and use any recovery to reduce exposure in loss-making trades.
Despite the higher STT, the budget maintains its commitment to capex spending, which is expected to positively impact sectors like infrastructure, construction, and related industries. Investing in companies within these sectors can be a prudent strategy, as they are likely to benefit from increased government expenditure.
Additionally, the revised tax rates and increased standard deductions under the new tax regime are anticipated to increase consumer spending. Consequently, sectors such as consumer goods, retail, and automotive might see a positive impact, making them attractive investment options.
A clear shift from momentum to value-oriented stocks is evident now that the budget is over. While the budget maintained infrastructure spending at the same level as the interim budget, disappointing expectations of a higher allocation from the RBI dividend, infrastructure stocks are likely to exhibit a gradual positive bias. On the positive side, increased focus on agriculture research and horticulture bodes well for companies like Avanti Feeds. The consumption sector is also expected to benefit from certain sops announced in the budget, with housing finance and cement stocks likely to be key beneficiaries. However, the overall negative sentiment triggered by the tax hikes is expected to dominate market dynamics, leading to a potential market-wide correction and a re-evaluation of investment strategies.
The provisions for boosting spends in agri sector, increase in spend on affordable housing, new schemes to provide incentives for employment generation, etc. may lay the foundation for medium term inclusive growth. Corporate earnings may see an upward revision if monsoon progresses well and macro parameters continue to show encouraging trends. Valuation of Indian markets may inch up a bit but a sharper rerating may require higher level of visibility on macro stability and micro growth. A breach of 24,850 could result in another 5-8% rise in Nifty while a break of 23,650 will make us cautious.
In light of the recent budget, investors should consider diversifying their portfolios to include sectors benefiting from new allocations, particularly in infrastructure and agriculture. While preparing for potential short-term volatility due to tax changes, it's wise to focus on long-term investment opportunities in these areas. Given the increased transaction costs, it's crucial to re-evaluate F&O strategies. As inflation trends towards the 4% target, keeping a close watch on interest-sensitive sectors could prove beneficial. This balanced approach aims to utilise budget-driven growth opportunities while managing risks associated with policy changes. However, investors should always seek personalised financial advice before making significant portfolio adjustments.
Overall, the budget emphasises fiscal discipline and targeted support for specific sectors, but its reception by different market segments will vary, with potential underperformance in mid-cap and small-cap stocks due to valuation concerns. Moving forward, the market's attention will likely shift to earnings reports and global cues.
Over the last couple of years, a significant portion of retail investors' money has been invested into economy-facing themes like PSUs, Infrastructure & Capital Goods, Manufacturing, and so on. These segments have performed exceptionally well, delivering returns of over 25-30%. Investors should now consider building a part of their portfolios around themes like Consumption and Pharma, which have been underperforming for the past three years but now present attractive growth opportunities.
We expect the equity markets to become more balanced as the growth in cyclical sectors (defence, manufacturing, capital goods, power) that have done well over the last 12-24 months get supplemented by the potential recovery in consumption as result of the budget provisions. Higher capital gains could also result in market valuations consolidating at current levels with rotation towards a more balanced sectoral performance. Given Budget’s par allocation to various sectors, thematic movements could subside leading to a bottom up stock selection becoming more important.
While Budget 2024 has triggered initial volatility in the markets, experts believe that the impact will be temporary. With strategic investments and a focus on sectors benefiting from government spending, the market is expected to stabilise. Investors are advised to adopt a cautious and diversified approach to navigate the post-budget landscape effectively.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
