Time to stay 'long' in the markets
01 Feb 2018
Kalpen Parekh, President at DSP BlackRock Mutual Fund
Let's stay Long ……Is the message coming out from the budget for us as investors. As investors, the most impactful budget provision was the re-introduction of LTCG at 10 per cent on Equities after a long break of 13 years. On first impression, it hurts the sentiment as we are always happy with tax free investment options. However, even today, for investors looking to grow their capital over long periods of time, equities remain the most efficient asset class as it offers higher growth and at still lower tax rates versus other asset classes like gold, FDs or real estate.
We feel this is overall a realistic budget focusing on growth continuity with realistic expectations and dominant focus on lifting rural incomes. This lends stability to the economic environment and supports the revival in corporate earnings witnessed in recent quarters.
If we seek evidence on impact of budget on future returns of stocks, the outcome is very random. In the last 21 years, since the budget day, the future one year market returns have seen a very wide range of -47 per cent to a high +102 per cent. This is in line with the randomness of short term returns and confirms no correlation between budgets and future market returns.
Equity returns over time are driven by earnings growth and valuation re rating. In the current environment, earnings growth momentum is picking up for good companies across many sectors while room for PE Re rating is less as we are at elevated valuations. Hence as investors, we should increase the time horizon of our investments and LTCG introduction will indirectly encourage this trend
On the other hand, there is a slight increase in fiscal deficit and the transfer of wealth to rural India via measures like higher MSPs can be inflationary. Basis this, interest rates continue to rise. Short Term bonds today yield between 7.5 per cent to 8.5 per cent and will increase future returns for debt investors. Asset Allocation funds investing across debt and equity continue to be attractive options for investors
My advice to investors would be to focus on and strengthen personal Budgets – earn more, spend less, save more, invest for long time horizons just like the government is strengthening the country's finances with stable long-term measures
