The Sensex today crossed another record high of 42,000 points. Analysts are questioning that with no corporate growth numbers happening, will this rally sustain. These days, all cautions is thrown to the wind, simply because when there is liquidity, nothing can stop a rally, no matter how expensive the markets are.
Wild budget speculations
The markets are now being driven increasingly by wild budget speculations. Take the case of the latest report that suggests Long Term Capita Gains on equity shares and equity mutual funds could go. One is not sure whether the government would really like to alter that, given the fact that the stock markets are already at a record high and the threat of a sharp deterioration in the fiscal deficit looms.
The equity markets are at record highs and not in a state of depression. Why would you want to remove long term capital gains, which is a source of decent revenue for the government. In fact, it would hit the projected fiscal deficit numbers even more, given the sharp slowdown in the economy.
Another wild speculation that is pushing the markets higher is a cut in income tax rates. That could be possible, but, a marginal tampering in Sec80C looks for more real for now. The government at the moment cannot go for drastic changes, given the fiscal deficit numbers. However, the argument in favour of a tax cut is the fact that we could see more income in the hands of investors, which in turn good push consumer spending and hence push economic growth. That is only logical and should have been done way ahead of the cut in corporate tax rates.
In fact, the government should not have gone in for a steep cut in the corporate tax rate and should have preferred a cut in personal income tax rates, to push demand and growth.
Will the rally in the stock markets last?
It is always difficult to hazard a guess on whether the market rally would continue. What is happening right now, is that there is a global rally. One cannot deny the fact that monetary easing has led to very easy liquidity conditions, which in turn is driving every asset class from gold to equities.
In India, mutual funds are flush with funds on fresh inflows from retail investors and Foreign Portfolio Investors are making a lot of investment, thanks to easy monetary policies. This trend has barely changed in 2019 and one doubts whether it would even change in 2020. Closer to the US elections sometime in November, markets could get increasingly volatile.
It is also doubtful that geo-political tensions (Iran-US) would play out before the US presidential elections in Nov, 2020. No President in this world would want to go to war, when there is an election and he is standing for a re-election. All in all, things look good at the moment, and the momentum is unlikely to change quickly. Sit tight at least until the November elections in the United States. Thereafter we do not know what could happen, it is always a risk.