Positives are Weighing Higher

Published on Oct 29, 2019.

On September 20th 2019, Finance Minister Nirmala Sitharaman surprised the street with the steepest cut in Corporate Tax Rates ever. This was a booster for the falling stock market as the profit estimates revised immediately. Stock markets immediately reacted and gained more than 8% in two days only.

The Nifty closed at 10704 on September 19th, the closing of 23rd September, after 2 market days, was 11600, an absolute rise of 8.3% in two days. This was the second biggest move in Nifty in last 10 years.We have gone back to the first such move to understand the aftermath of such a massive buying. On 18th May 2009, the Nifty closed at 4323 up from the previous day’s closing of 3671, a massive gain of 17.76% in absolute terms after the announcement of UPA 2 forming the government at centre. This is a well know fact, but what happened afterwards is more interesting –

Date Period Nifty Closing Absolute Return
18th May 2009 1 Day 4323 17.76%
23rd Nov 2009 6 Months from closing of 18th May 2009 5103 18.04%
05th Nov 2010 1.5 Years from the closing of 18th May 2009 6312 46.01%

In 2009, it was the time when the aftershocks of the sub-prime crisis were still being felt, the economy outlook was looking doom, the fear overcame the rationale and valuations were deeply suppressed. The shadow banking crisis had hit economy bad in last 1 year yet the magnitude is not as high as the financial crisis of 2008 primarily being that global in nature, the inaction on the part of the government, was making the condition worst. The corporate tax rate cut has delivered a very important message that government has intent to fix the things right. This is what gives us comfort to get overweight again on domestic equities.

The Q2 Results session has been a mix so far with net profit growth of a sample of 69 companies in a study done by economics times; which declared results by 21st Sep, showing a profit growth of 12.5% YoY and revenue growth of 5.6%, low revenue growth is a concern as it highlights the slowing demand. We expect the government is targeting this with the next round of tax reforms that is expected to be announced in the next budget session or before that. 

We think it’s time back for the equities, there are certainly concerns of fiscal slippage but government has tools to manage it, given the oil prices expected to remain benign for an extended period of time. There is a larger concern of global recession or the NBFC crisis further deepening, but we think we are months before for these events to unfold. For now, positives should weigh higher than negatives.

Clovek Research