As Budget 2018 throws a curve ball at the market, it might lose recent swagger and turn practical

“The art is not in making money, but in keeping it,” says an old proverb. With the Budget throwing a curve ball at the market, the bulls will be challenged this week to cling to the wise saying.

So, what happened? The rules of the game were changed by the house on 1 February, 2018 when the Finance Minister presented the Budget. A 10 percent capital gain on long-term gains on stocks was imposed. It was expected, but nevertheless it jolted the applecart. The cart itself being at elevated levels must now deal with a slope which has suddenly turned slippery.

Money flows into capital market from different sources. A 10 percent tax may not seem to be much but to some allocations it may change the equations. Arbitrage funds which have grown recently, funds which are mainly dividend-oriented, balanced funds and foreign endowment funds are each different kettle of fish. A 10 percent change in the return can affect flows from these taps.

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Since January 2017, the Nifty has rallied by almost 3000 points delivering a breath-taking gain of 36 percent. The intermediate trend of the market is now 13-months-old which puts it in the mature category making it vulnerable for a correction. During this gain, the index did not correct by even 5 percent once, which also shows how one-sided the rally was. A correction of at least about 8-10 percent is considered quite normal and part of a bull market. The Nifty may find support around the 10,500 level initially. It will be important to see if buyers step in there.

Smart money was already on the move. Many small and mid-caps have seen profit taking in January. This money has moved to large caps and defensive sectors like IT and consumption. Global emerging market flows have been huge recently which has led to FII’s being net buyers in the new year. Typically, this money goes to larger liquid names, which are part of the bigger indices. And that may be the trend for the coming weeks.

The Budget does have positives. If rural India does well, corporate India and investors will do well. But where the Budget has been a drag is the slip in fiscal deficit, the tax on long-term gain and the raising of import duties on a slew of products. The bond market responded immediately by taking the yields higher. Equities followed the next day with the Nifty losing 2.3 percent.

2018 could be a year of uncertainties in many fronts. The market may lose some of its recent swagger and turn practical. Global growth, emerging market flows, benign inflation, domestic liquidity and improving corporate earnings are still in play and give comfort to the long-term investor. They should step in as valuations turn attractive. The unexpected positive will be if GST collections increase above estimates in the coming months.

Milton Friedman and Grover Norquist may not have agreed with the Finance Minister on this Budget. As some of the speculative excesses get snuffed out, genuine investors who have done their homework may well remember Peter Lynch: “The key to making money in stocks is not to get scared out of them.” And if you are a trader, the only Holy Grail to remember is risk management.

(The author is a partner at Goldcrest Advisors LLP. He tweets @dev_rivervalley)