ET Markets
Stock Analysis, IPO, Mutual Funds, Bonds & More

Tax cut a game-changer; may see straight big gain on Monday too: Vikas Khemani

I will not be surprised all the pessimists start turning around now.

ET Now|
Last Updated: Sep 20, 2019, 04.54 PM IST|Original: Sep 20, 2019, 04.54 PM IST
Vikas Khemani-1200
As long as the directionally things have changed, this is bringing the risk appetite back, says Vikas Khemani, Founder, Carnelian Capital Advisors. Excerpts from an investment with ETNOW.

We were speaking just a few days ago and there were such a lull in the markets, the economy. Nothing was moving. Today we have got this blockbuster Friday, a pre-Diwali bonanza. How are you reacting to the FMs measures, did it take you by surprise?
Absolutely. I think this is a very, very big game-changing event. This establishes one thing. It is very clear that this government is committed to revive the economy and is giving the message that they we will do whatever it takes to fix the economy.

This kind of messaging will bring the animal spirits back. Post the budget on July 5, the sentiment got impacted significantly more than anything else. The finance minister has done four things: a) Released liquidity in the system through various measures. b) Brought the credit cycle back which was urgently needed; c) Encouraged the investment cycle and d) Released a lot of equity in the system. By reducing tax, you effectively are releasing that much equity in the system which is available for further investment.

Finally, there is a communication to the markets that reviving the sentiments is more important because without that, people are unlikely to consume. So with today’s move, FM has really achieved a big revival of sentiment. I will not be surprised all the pessimists start turning around now. We have seen the market bottom earlier. We will consistently see improvement in the economy across the board.

She has not left any stone unturned. What do you feel will be the most significant trigger? What is the kind of liquidity injection we can see and when would we start seeing the impact of this on earnings?
As I said, this is a very big message from the government, showing its willingness to revive the economy. It is very comforting to the market that whenever the government reduces tax rate, money is released immediately because corporates are paying advance tax every quarter on quarter.

So, somebody who has paid advance tax based on the estimated 35% tax rate by June, does not have to pay any advance tax in September and in December or he has to pay less advance tax. To that extent, the money is automatically available. That itself is very big and it is almost 0.8% of GDP. If I have that much money available, my net worth goes up by that level. So, I have that much available equity for levering and investing.

Let us say most of the banks pay huge amount of taxes. If the tax rate is going down from 35% to 25%, to that extent, their net worth will go up and capital adequacy will go up and ROEs also will go up. So a multiplier effect plays out and that is also in some sense capitalising the banks without putting direct equity.

In my opinion, this is a very significant move by the government and this is implemented with immediate effect. You do not need to do anything.

When we just look at the optimism that you are seeing on the Street, do you think it is also because there was a heightened amount of pessimism earlier?
There was a huge amount of pessimism. A huge amount of short built which led to a significant short-covering. You see that partly getting pronounced by the short covering but that always happens. Downward move was not as bad as markets were making it out to be. So you always extend it on the other side.

As the first step, you will see short cutting by the shorts and then you will start seeing longs getting built. When the risk appetite comes back, people will start to deploy money. This change itself makes a big thing and I do not think that this is a one-two-day phenomena. In my opinion, it changes the entire cycle and then the change of cycle happens. I am not commenting on day to day movements, I feel that probably the market bottom is behind us. Now you will see the upward trajectory resuming. Now it can take two or four quarters, that is immaterial. As long as the directionally things have changed, this is bringing the risk appetite back.

Today we are seeing this booster reaction across the index. How do you see this momentum building going forward?
It will continue. It will be built from here on and I would not be surprised if on Monday also you see a straight big gain. A lot of foreign investors, who have been sitting on the sidelines or were negative, would take note of this and again as I said the message which is there is that we will do whatever it takes to force people to change their view on the Indian economy. Also, this coincided with the change in the global scenario where Fed has said that we will expand if it is required. So, slowly things are changing both on global front as well as local fronts. If this change happens, this is not going to last only for a few days or few weeks, it is structural and you will see this getting corrected.

Also Read

Not only largecaps, allocate to mid & smallcaps too in 2020: Vikas Khemani

We are sitting on 30% cash, buying systemically: Vikas Khemani

We are going to see a slow and steady repair in economy: Vikas Khemani, Carnelian Capital Advisors

Market is in extreme panic, it is like early 2009 or 2003: Vikas Khemani

Disappointed with govt intent to divest strategically in PSUs: Vikas Khemani

Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links

Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service