Bulls and bears are the trends when we speak about the stock markets. Indian stocks markets these days are witnessing a bearish (downward) trend amid various issues. Stock markets have tumbled in the past two weeks because of the weak sentiments and rather weak implementation of reforms. Modi Govt has so far failed to maintain the sentiments of the bulls. Experts and investors are of the view that the Modi Govt has just been words till date. So why are we witnessing this bearish trends?
Indian markets are fairly dependent upon investments by FIIs( Foreign Institutional Investors) and FPIs( Foreign Portfolio Investors), also termed as “Hot Money”, which makes the Indian markets vulnerable to any uncertainties.
Presently, the MAT (Minimum Alternative Tax) issue seems to have reversed the bull run. (Here is a brief idea of what MAT is: It is a minimum tax to be paid by companies making substantial profits but which seem to have no significant income on paper due to deductions and exemptions)
” The hardest thing for a human being to understand is tax laws” – Albert Einstein
MAT as such is only applicable to the companies where the income tax calculated under the IT Act is less than 18.5% of the book profit. Companies coming under the exemption of DTAA(Double taxation Avoidance Agreement), 89 countries out of which 87 treaties are active, continue to enjoy the tax-free income from the capital gains. Roughly, a week ago, the IT Dept sent out notices to around 68 FII and FPIs demanding a tax liability of Rs. 602 Cr. This step created a havoc in the markets regarding the tax reforms in India. Post this, FPIs started pulling out money from Indian markets and thus putting downward pressure on the index. Although the MAT issue has now been resolved for the future years, MAT is still going to be applicable to FY 2014-15 capital gains and we might see a further bearish trend in the coming weeks.
On the domestic side of the economy, Indian steel and tyre industries are in a highly distressed condition. China and Japan who are currently sitting on a huge inventory of steel and tyre produce, are dumping the entire stock in the Indian markets at a price cheaper than persisting indian costs. Frankly, we cannot stop the supply from Japan because of the free trade agreement. China on the other hand can only be restricted by certain import duty changes. MoF needs to take some serious steps in regards to increase import duty on steel. Collectively, it has lead to weak corporate earnings and finally added to the ongoing bearish trend.
On the other side of the globe, Euro Zone has replaced US in investment grades. ECB’s QE(quantitative Easing) seems to have worked in reviving the economy and ending the deflation phase. Although, “Grexit” still remains a key concern in determining the direction of the Euro Zone. US has registered a GDP growth of merely 0.2% in the first quarter thus suggesting a slow progress. Reasons being the abnormally cold weather, cautious consumption and strengthening of the dollar. Fed interest rates hike is thus unlikely till about Sept this year.
In technical analysis jargon, the index has breached the vital 200 DMA (Day Moving Avg), which indicates further fall from the current levels. The trend can be expected to continue in the same direction if the scenario remains unchanged. In fact, this can be an appropriate opportunity for the aggressive traders to grab the value stocks and gain appreciation of the value in the long run.
Thank you 🙂