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Sensex falls nearly 1,200 points since Budget 2019: Five factors that led the market lower

On Budget day, Sensex rose to 40,032 level gaining 124 points intra day before the Budget speech started. However, the index tanked 467 points intra day to hit a low of 39,441 after FM Sitharaman finished her maiden Budget speech.

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Sensex falls nearly 1,200 points since Budget 2019: Five factors that led the market lower

Union Budget 2019 has delivered a rude shock for the market. If in the last Union Budget, it was  long-term capital gains tax of 10% on profit above Rs 1,00,000 on sale of equity shares which jolted Sensex and Nifty, this year a host of several announcements has spoiled sentiment across Dalal Street. While Sensex has lost 1186 points, Nifty has fallen 387 points since July 5. The market has given a big thumbs down to the Union Budget 2019.  

On Budget day, Sensex rose to 40,032 level gaining 124 points intra day before the Budget speech started. However, the index tanked 467 points intra day to hit a low of 39,441 after FM Sitharaman finished her maiden Budget speech.

It took 17 sessions for Sensex to reclaim the 40,000 mark on Budget Day (July 5) after it crossed the key level on June 11.

Also read:Minimum public shareholding at 35%; here's how it will impact stock market liquidity

Today, Sensex tumbled 792 points to close at 38,720 level. Nifty too tanked 252 points to 11,558 extending losses from the Budget day session. Sensex lost 908 points intra day today taking the total losses of last two sessions to 1,375 points (467 points plus 908 points). Nifty lost 437 points intra day in both sessions. 

Mustafa Nadeem, CEO at Epic Research said, "There was an increase in volatility which is up by more than 6%, while at the same time we have seen aggressive writing in calls at strikes of 11,800 - 11,700. This was the first signal with a long addition in PE around 11,500 - 11,400 further manifested a breakdown in the market. Secondly, this can be attributed to profit booking in the market at higher levels.  There was no revival of the bulls at any point in time where they showed strength and the derivative data from the morning was negative. Somewhat we believe it was all sowed on the Budget day itself when Nifty was down with a long bearish candle. This is a follow up of the same action. "

Pradeep Kesavan, Senior VP, Equity Strategy, Institutional Equities at Elara Capital said, "Today's market fall has been due to a combination of global and domestic factors. Globally, a positive payroll expansion- ahead of estimations, has led to a fear of anticipated Fed rate cut not coming through. This fear of consequential impact on global flows has been felt across emerging markets. Domestically, proposals in the budget to increase in minimum public shareholding levels to 35% was a dampener along with 20% tax on share buy-backs. We also had more negative news in terms of cut in vehicle production announced by Maruti, deficit monsoons and reduction in area sown in Kharif crops, in an environment of continuing farm distress and weak demand for consumer products. All these added to the fact that there were no immediate measure that was announced in the budget which could kick-start consumption and related economic activities. With valuations not particularly cheap any more, all these factors weighed heavily on the market and precipitated a fall."

Here's a look at why Budget 2019 presented by Nirmala Sitharaman has roiled the  market.

20% tax on buyback of shares

Finance Minister Nirmala Sitharaman proposed to extend the buyback tax at 20 percent to listed companies as well. A listed company will now have to pay tax on buyback under section 115QA at the rate of 20 per cent plus applicable surcharge and cess. The move will affect buyback by all listed companies in future.

Import duty on gold hiked

Budget 2019 made provisions to raise import duty on gold and precious metals to 12.5 per cent, from current level of 10 per cent. It is to be noted that India is one of the largest gold importers in the world. In 2018-19, India imported gold worth $32.8 billion. The hike in import duty is likely to make gold costlier. This is a huge negative for listed companies dealing in jewellery. MMTC has been losing for the last two days and has fallen 6.87% during the period. Jewellery stocks have been falling since the hike in duty was announced. Tribhovandas Bhimji Zaveri share price has been losing for the last 2 days and has fallen 6.87% in the period.

Similarly, Thangamayil Jewellery stock has lost 11.48% in the last 3 days. Titan stock too has lost 5.15% in last 3 days.

No change in LTCG tax on equity

The budget failed to impress stock market investors as they were expecting Nirmala Sitharaman to roll back long term capital gains (LTCG) tax on equity investments in Budget 2019. According to experts, withdrawal of capital gains tax would have helped in channelising more funds to markets either directly or through mutual funds. It can help bring stability in the market while making the investments in stock market and mutual funds more lucrative and beneficial for the investors.

Instead, the government raised additional surcharge on top of the applicable income tax rate from 15% to 25% for those with taxable incomes of between Rs 2 crore and Rs 5 crore, and to 37% for those earning more than Rs 5 crore. This takes the effective tax rate for those two groups to 39% and 42.74%, respectively.

VK Sharma, Head - PCG & Capital Market Strategy at HDFC Securities said, "The budget fine print clearly shows that income tax authorities have imposed surcharge of 25% for income above Rs 2 crore and 37% for income above Rs 5 crore. So for investors, capital gains above Rs 2 crore whether short term and long term will attract additional surcharge for residents as well as non-residents. And the same is the case for capital gains above Rs 5 crore. So for illustration purpose, for investors with capital gains more than Rs 5 crore-long term capital gains tax has increased from 11.96% to 14.25%. Similarly, short-term capital gains tax effective rate has increased from 17.94% to 21.37%. Higher taxes have definitely affected sentiment of investors in the short run. Over a longer term, India's favourable demography and superior growth prospects will attract capital." 

Proposal to raise public shareholdings to 35%

FM Sitharaman proposed to raise the minimum level of public shareholding from the current level of 25 per cent to 35 per cent. If Sebi follows the government proposal, many MNCs and IT companies with high promoter shareholding will have to meet the requirement. There are 1,174 listed companies where promoters holding are over 65 per cent stake.

Domestic brokerage Centrum Broking said a fourth of all the listed companies or 1,174 to be specific, have promoter shareholding above 65 percent at present.

"At the current market prices, the total quantum of sale that needs to be done by these 1,174 companies works out to be a whopping Rs 3,87,000 crore," its head of research Jagannadham Thunuguntla said.

The stake sale by promoters would lead to draining out of liquidity which would be a big negative for the market.

Law firm Shardul Amarchang Mangaldas partner Yogesh Chande warned that the move may force some companies, especially the multinationals, to explore delisting.

This would reduce the size of market and spoil investor sentiment.

Asian stocks sink

Asian stocks tumbled today after unexpectedly strong US employment data tempered hopes the Federal Reserve might cut interest rates. Benchmarks in Shanghai, Tokyo, South Korea and Hong Kong all declined.

The Shanghai Composite Index fell 2.5% to 2,936.97 and Tokyo's Nikkei 225 lost 1% to 21,520.70. Hong Kong's Hang Seng retreated 1.6% to 28,301.77 and Seoul's Kospi declined 1.8% to 2,072.60.

Australia's S&P-ASX 200 gave up 1% to 6,682.60 and Taiwan, New Zealand and Southeast Asian markets also declined.

Wall Street fell on Friday after the Labor Department said employers added 224,000 jobs in June. That was better than forecast and a rebound from May's disappointing weaker-than-expected job creation.

The benchmark Standard & Poor's 500 index lost 0.2% to 2,990.41. The Dow Jones Industrial Average dropped 0.2% to 26,922.12. The Nasdaq composite slid 0.1% to 8,161.79.The Fed holds its next policymaking meeting at the end of the month. The panel will reveal whether it has decided to cut rates for the first time since the Great Recession in 2008 in the face of slowing economic momentum around the world.

Last year, Fed officials raised rates four times, in part to stave off the risk of high inflation and in part to try to ensure that they would have room to cut rates if the economy stumbled.

Edited by Aseem Thapliyal

Union Budget 2019: Nirmala Sitharaman gives no relief to individual taxpayers, disappoints super-rich

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