Budget 2024: market will be closely monitoring changes in the capital gains tax treatment on equity- Sunil Damania

Budget 2024:  On the Budget day,  Sunil Damania, Chief Investment Officer, MojoPMS feels that a trading approach is less sensible compared to an investment strategy as budget's impact on market volatility has diminished. While Damania says that the market will be closely monitoring potential changes in the capital gains tax treatment, he says that there is need to revive consumption Cycle. Edited Excerpts

What are the key positives and negatives that will be looked at in the budget?

During the Budget speech, the market will be closely monitoring potential changes in the capital gains tax treatment on equity. Additionally, there is a need to revive the consumption cycle, making tax rebates essential to stimulate this area. The Reserve Bank of India's record dividend provides the government with more flexibility to invest in infrastructure without compromising the fiscal deficit. Therefore, three key factors that the market will be watching include:

Changes to the capital gains tax on equity

Tax rebates to stimulate consumption

The government's utilization of the record RBI dividend

What should be the trading strategies of investors before the Budget and on the budget day?

Historically, the Budget's impact on market volatility has diminished, with many non-Budget days exhibiting higher volatility. We consistently advise adopting a long-term investment approach in equities rather than a trading perspective, as numerous reports suggest that most traders incur losses. Thus, a trading approach is less sensible compared to an investment strategy.

What sectors are preferred bets before the budget that can benefit?

The Defence and railways sectors are anticipated to see significant growth; however, many stocks within these sectors have already experienced substantial price appreciation. Considering the risk-reward balance, we identify sectors such as FMCG, capital goods & infrastructure, and pharmaceuticals as preferred investment opportunities post-budget.

The FMCG sector stands out due to the anticipated income tax relief, which is expected to boost consumer spending and, consequently, increase demand for FMCG products. The previous weakness in the rural economy for this sector is likely to be addressed in the upcoming budget, with a stronger focus on rural development potentially driving volume growth. Additionally, with forecasts predicting normal to above-normal monsoon conditions, agricultural income should rise, further stimulating demand for FMCG products.

In the interim budget, the government allocated ₹11 lakh crore to infrastructure development. With the record dividend from the RBI, it is probable that infrastructure funding will increase further to enhance India's global competitiveness in logistics costs to make China plus one feasible.

The pharmaceutical sector is poised for growth given India's aspiration to become the 'pharmacy of the world'. Government incentives aimed at reducing dependency on Chinese raw materials, combined with strong domestic demand and favorable developments under the U.S. Biosecurity Act, position Indian pharmaceutical companies advantageously for future expansion.

Are the markets near highs factoring most of the positives from the budget?

The market's recent upward movement is primarily driven by momentum, with liquidity flowing into stocks regardless of their valuations. India holds the second-highest market capitalization to GDP ratio globally, following the United States, which indicates a richly valued market.

Will FII flows remain positive or they may again turn volatile?

In the last financial year, Foreign Institutional Investors (FIIs) recorded substantial inflows. However, it is uncommon for Foreign Portfolio Investors (FPIs) to sustain record inflows for two consecutive years. We believe that the high valuations of the Indian market may deter significant investments from FIIs.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions