Tax Cuts Unleash Animal Spirits in the Market – But Only the Patient Ones Make Money!!

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“Smart people often do well in life” – haven’t we heard this so many times? But in investing, you need to be patient to make money – let’s understand.

The government surprised everyone (albeit positively) last Friday by reducing corporate taxes. It is a substantial cut – existing companies will now pay 25.17% vs 34.94% earlier, while for new companies it has fallen to 17.01% from 29.12%. There was also a reduction in MAT from 18.5% to 15%. This move set the markets on fire with Sensex and Nifty rising by 5.32% in a day (this is the yearly post tax return of a bank FD). This was also the biggest gain for Sensex and Nifty in the last 10 years.

Let’s first decode this move by the government – why is it a big deal and what’s the impact going to be on the economy. This has been done with the twin objectives of reviving domestic businesses and attracting foreign companies to set up manufacturing in India. In the last 6 months, the domestic business environment had become sombre combined with negative news flow ranging from crashing auto sales to no buyers for a Rs 5 packet of biscuit. The GDP has fallen to 5% from a recent high of 8% and warranted bold measures. Every government has fiscal and monetary tools at its disposal to address economic slowdowns – this is one of the fiscal measures which has been exercised.

Impact On Domestic Companies:

  • Companies will now have the option of passing on this tax saving to the consumers in the form of price cuts which will revive demand for most consumer products -automobiles, consumer goods and consumer durables.
  • Alternatively, they can retain these tax savings and plan capital expenditure to set up new factories/plants once they have visibility of revival in demand.
  • Either way, it will lead to more job creation – once people start consuming more, companies will have to expand capacities (more plant & machinery) and increase hiring (more jobs will further lead to an increase in consumption and the cycle will roll on).
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Attracting Foreign Companies:

  • India’s corporate tax rate is now among the lowest in Asia making it an attractive destination for foreign companies to invest.
  • The existing MNCs in India will be encouraged to step up investment, thus creating more jobs.
  • The two biggest economies in the world – US & China – are engaged in a bitter trade war. This will attract firms moving away from China to India.
  • Exports have been dwindling for the past two years. The reduction in corporate tax rate will help in increasing exports, jobs and GDP growth.

Overall this is a positive step for the economy and GDP growth. The markets cheered this announcement and rightly so. But as an investor, there is a learning from this market move on the importance of “Time in the markets is important than timing the markets”. Let’s understand how.

Staying Patient During Market Lows Can Help You Reap Rewards!

Till 19th Sep – the day before this announcement most of the investors who had invested in the last two years had negative returns in their portfolios, even returns on SIPs were negligible. The sentiment was one of gloom and doom – many remarked ”mutual fund sahi nahin hai”. Some had given up and withdrawn their investments to keep safely in the bank accounts. Others were on the brink of giving up and there were very few brave hearts who were willing to invest.

And then there is this category of investors- the no nothing or the patient investor (endangered species but may their tribe grow). He is the one who has invested in equities to create wealth and achieve his goals, has done the right asset allocation( basis his age, risk profile, time horizon, investment objective) and not bothered with what’s happening in the market. Another rare but special quality he doesn’t look at his portfolio every day. Investing is very boring and is meant to be that way, just invest prudently and stay put-simple. But as Warren Buffet famously said- “Investing is simple but not easy”.

During one’s investment journey of say 10 years there are 10 days (like one yesterday) which determine whether you make an 8% or a 15% return. But no one knows when will those 10 days come. Equities, as an asset class, are unpredictable and volatile – that’s the nature of the game. While playing this game, we try to outsmart the market by taking cash positions, leveraging, over/under-investing at different junctures. When one looks back at the results of these moves mostly it’s in the red since they are governed by greed or fear. Another famous Buffet quote – “Be greedy when others are fearful and fearful when other are greedy”. The simplest way to win this game is to stay invested at all times so that you don’t miss days like yesterday. Keep investing systematically and ride the lows & highs of the markets – you will reach your destination.

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The Million Dollar Question – Will This Party Continue?

Indian stock markets have been in a perpetual party mood since the last 40 years – Sensex has returned 16% CAGR in this duration. Occasionally there have been gate crashers (market corrections) who have disrupted this party. The patient investor by not doing anything would have grown his 1 lakh to 3.9 cr in these 40 years.

This move by the government has revived the sentiment which has suddenly turned positive. Also, India had witnessed huge FII selling this year. These flows could now reverse and the rally should continue in the short-term. The markets had been anxiously waiting for the corporate earnings to revive. “Markets are a slave to corporate earnings”. In the long-term, its only corporate earnings that matter. The earning estimates for both Sensex & Nifty have already been revised upwards by many research companies.

What Should One Do Now – Invest More or Book Profits?

You should do neither basis this move only. The decision to invest more should be a function of how much more can you save to invest. Once you have higher savings – assess your goals, age, risk appetite, time horizon – do the right asset allocation and just invest (wherever the market maybe or whatever be the sentiment). Post investing, just stick to the asset allocation and keep investing more systematically. Over the long term, equity markets in India and well-chosen equity mutual fund schemes will deliver returns better than the nominal growth (GDP growth rate + inflation) in the country which should be in excess of 12%.

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