D-Street short-sellers wary of another ‘set up’
This means investors can expect another 5 per cent-7 per cent gain soon after the 5 per cent run-up on Friday.
Short-sellers on Dalal Street, who found themselves trapped in the market’s strong rebound on Friday, might be able to relate to this tactic. Though ambushing market punters could have been the last thing on the government’s mind, what finance minister Nirmala Sitharaman did last week had all the traits of a set-up similar to cricket.
Short-sellers had mounted their bearish bets in recent weeks after they judged that the finance minister’s announcements spread across frequent press meets to talk up sentiment were turning out to be a damp squib. Little did they realise that Sitharaman still had a flipper ball up her sleeves. Though the more alert traders cut their positions, sensing something big was in the offing since the announcements were being made during trading hours most short-sellers were complacent and failed to read it.
The cut in corporate taxes came as a big sentiment booster — clearly the most potent by the Modi government and one that has potentially set the stage for the much-awaited turnaround in the economy and markets. The 5 per cent rally in the Sensex and Nifty was its best single-day performance in 10 years. Even some of the most hardnosed of cynics would possibly agree the market was not unjustified in its reaction. That’s because the gains from the corporate tax cut are there for people to see, something that companies are going to enjoy in the coming years. Many analysts have bumped up their Nifty earnings estimates. So if companies’ earnings expectations have been raised by 10-12 per cent, the market is likely to factor in those upsides quickly. This means investors can expect another 5 per cent-7 per cent gain soon after the 5 per cent run-up on Friday.
While investors are sanguine about the impact of the well-intended tax cut on the market’s near-term prospects, they turn slightly skeptical about its trickledown effect on the economy. Various studies show companies that are in the best shape will end up becoming the biggest beneficiaries of the stimulus. Many of these firms are already cash-rich and have refrained from spending money to expand in recent years.
Economics textbooks say that companies use their funds to grow when the demand outlook looks robust. With the demand in the economy still looking uncertain, it would be interesting to see if companies would still want to spend the additional corpus.
A better situation would have been if the government ensured that a portion of the stimulus went to ailing companies, which would have helped them reduce their debt. In 2003-04, the clean-up of companies’ books had set the base for the one of the biggest bull-runs ever.
Once the excitement over the stimulus abates or if the global economy flounders, investors are likely to raise questions about the country’s finances. The concern is that the stimulus has left the government with little room to give another push to the economy if required. The joker in the pack is oil prices. The government will be keeping its fingers crossed that it does not have to deal with high oil prices, which would result in its calculations going awry and make the economy and markets vulnerable again.
Experienced money managers said it will be crucial for the government to ensure that the stimulus is not wasted. It would be a good opportunity to push through stake sales of some large state-owned entities to keep investor sentiment buzzing. A senior fund manager said it investors should wait for a year to see the impact of tax cuts on economic activity.
Whether companies use the bonanza for capex or enhance their cash chest, one thing is fcertain: punters will dare not take the finance minister for granted. Who knows when the next ‘set-up’ is.