The Sensex and the Nifty came crashing down in trade today, seeing their worst losses in months. Here are 5 reasons which saw some massive selling pressure after a long time. The Sensex was down a huge 840 points in trade, marking its worst falls in 2018.
Markets hit by Long Term Capital Gains
Clearly, recommendations of the Union Budget spooked investors. While Long Term Capital Gains Tax (LTCG) may have been factored by the markets, what was worrisome is that the government retained the Securities Transaction Tax (STT). Previously, when the LTCG was scrapped STT was introduced. So, the anticipation was that if one is levied, the other would be done away with.
The LTCG of 10 per cent after a one year holding and that too without indexation is not good news for investors.
Returns from equities will now narrow down and with bond yields rising, debt instruments might now become a much better investment than equities. Brace yourself for some more downside risk.
Poor showing by BJP in the election bye results
The going is suddenly getting tough for the Narendra Modi government as 2019 elections approach. The BJP did not win a single seat in the three bye elections in Rajasthan, neither did it it win the lone seat in Bengal where elections were held.
Analysts are now viewing this as a much more difficult battle for the Narendra Modi government in 2019 then thought.
This impacted sentiments, which were already hit by recommendations from the Union Budget. There is no telling where the markets could be heading from here.
Taxation on equity mutual funds
Money has poured into equity mutual funds in the past one year, following de-monetization. Now, the government has decided to tax the income distribution on equity mutual funds. By this move, returns from equity mutual funds would be reduced.
If inflows into equity mutual funds reduce, we could see a strong pull back in the markets, which could lead to further correction in equities. Thousands of crores has flowed into mutual funds, which has kept equity prices elevated. Time to cough-up some tax.
Weak global cues
Global cues were weak since the start of the day, as bond yields in the US rose in anticipation of higher inflation, leading to a drop in global equities. If the trend persists of rising yields, we might see global markets drift lower.
This is because investors will book profits in shares, which are at extremely elevated prices and move money to debt, which has now started to offer better yields than before.
Analysts have been screaming that the markets have been overvalued.
In fact, the trailing Sensex EPS of more than 25 times is horribly expensive. Mid cap and small caps have reached such high levels, one can barely thing of buying into them. Indian markets are among the most expensive globally and some cooling off was warranted.
In fact, the government may have taken cognizance of this fact and decided to levy a Long Term Capital Gains tax. In a way this is not bad at all.