Dalal Street is not at all happy with the Union Budget 2018, as reflected in the benchmark equity indices. BSE Sensex tumbled over 500 points in early trade on Friday, while NSE Nifty index slipped below the 10,850 mark.
Analysts said reintroduction of the long-term capital gains has mainly spooked market sentiments. The government's fiscal slippage is another.
There are expectations that the zeal for equities may dip after the government reintroduced long-term capital gains (LTCG) tax after a 14-year gap.
From April 1, investors will have to pay 10 per cent tax on profits exceeding Rs 1 lakh made from the sale of shares or equity mutual fund units held for over one year. LTCG is currently exempt on all equity gains.
India Inc said the Bharat-oriented Budget with a thrust on improving the rural economy would help fuel consumption demand, alleviate farmers' distress, create jobs and set the tone for future growth.
"In a populous, agrarian country, a populist, pre-election Budget can be pro-growth! I'm biased, since it ignites growth in our key rural markets. So instead, I'll laud the Budget for health insurance for 10 crore people. That's a real step towards becoming a developed society," Mahindra Group Chairman Anand Mahindra tweeted.
Market veteran say it will take some time for the dust to settle. The disruption is real, but it is unlikely to cut the short the ongoing bull run.
Existing equity investors and those planning to enter the market for the first time should bide their time.
"New investors should use this correction as an entry opportunity, as we believe long-term fundamentals of the economy remains intact," said Sandeep Raina, Associate Director, Edelweiss Investment Research.
One should look at stocks of companies with strong growth and balance sheets. Stocks in the consumption and FMCG segments will benefit from the rural focus of the Budget. Moreover, metals and chemicals sectors can be looked at, Raina said.
He is positive on Dilip Buildcon, Philips Chemicals, Century Ply, PNB Housing and Birla Corporation after the Budget.
Hemang Jani, Head of Equity Sales & Advisory at Sharekhan said investors should focus on sectors and stocks with an agri or rural focus. The Budget is positive for Escorts, Ashok Leyland, M&M, PI Industries and UPL.
Despite reintroduction of LTCG, equity will remain best asset class for investors, analysts say.
Vidya Bala, Head of Mutual Fund Research, FundsIndia, said a 10 per cent LTCG on capital gains over Rs 1 lakh does not significantly impact the returns of equity investors for several reasons.
One, equity still remains a superior asset class compared with other asset class returns. Two, the tax proposed makes the asset class far more tax efficient than other options, such as interest on deposits. Three, only gains over Rs 1 lakh is taxable at 10 per cent, she said.
To make dividend payout and capital gains equitable in terms of tax on equity funds, the Budget proposed a 10 per cent tax on distributed dividend. So far, equity fund dividends have been exempt. This had resulted in many equity funds being wrongly marketed as tax-free income products.
"With dividends proposed to be taxed, categories such as balanced funds and arbitrage funds will need to be invested for their own merit rather than being used for tax benefits," Bala said.