Weekend Investing Daily Byte - 3 Dec 2024

The market progressed even further up today, contrary to many market expectations that the market would go down. Instead, the market is doing exactly the opposite, and we need to follow the price. The large narrative that was playing around was on taxes. Today, death and taxes are the only two certainties of life.

Table of Contents

Where is the market headed?
Sectors of the Day
Stock of the Day
Story of the Day : death and taxes, the only certainties in life.

Where is the market headed?

Market Overview

The Nifty has finally broken out. That is the news for today, up 0.75%. This five or six-day congestion zone has been broken out of. There are some resistances near 24,500, and I think we may spend some time here. Given that the RBI rate cut outcome is still a few days away, and while the banks have run up in anticipation of a rate cut, there is still some time to go. So, possibly in the next few days, it’s likely that we won’t shoot up immediately. Instead, we may stabilize here and then, at the event, if it happens, we may go up. The market is poised for a thousand-point run. That is my belief: if we get a run, it will be at least a thousand points. This is coming on the back of poor GDP numbers, increasing taxation, and increasing threats from the US. So, the market is brushing aside all the negative news being thrown at it.

Nifty Next 50

Nifty Junior was up another 1.02% today, clearly breaking out of the entire last one to two months of consolidation and going up.

Nifty Mid and Small Cap

Nifty Mid Cap also gapped up and stayed up by 0.88%. Small caps were also up by 0.94%, although a lot of the portfolios haven’t moved accordingly, because there has been a shift now. The laggards in many of these indices have moved up today, so it’s almost like the laggards are now catching up, and the leaders are staying where they were. Some sort of a rotation is happening within the indices.

Nifty Bank Overview

The Bank Nifty, after a very long period of more than two months, has reclaimed the level of 52,700 and is now only a stone’s throw from an all-time high, up 1.13% today.

Advanced Declined Ratio Trends

In terms of advances to declines, you can see that there were 378 advances to 118 declines, so the market was heavily skewed towards longs.

Nifty Heatmap

The Nifty heatmap also shows more green than red. You had HDFC Bank go up by 1.3%, State Bank of India up by 2%, both rallying ahead of the rate cut. Axis Bank was up by 2%, and life insurance companies went up on rumors that the GST component might be removed from them. Reliance and ONGC also went up due to taxation cuts on oil. Some tech companies went up as well. Wipro, in particular, is an aberration as it is adjusting for a bonus split and will get corrected tomorrow. NTPC, Adani Ports, and Ultra Cement were some of the other winners. Public sector banks made a huge move today. Stocks like PNB, Canara Bank, and even State Bank of India moved up. ICICI, General Insurance, Siemens, Startup Power, Ambuja Cement, DMart, and TVS Motor were also among the winners.

On the flip side, Varun Beverages lost on the news of a potential higher GST being imposed on aerated beverages.

Sectoral Overview

Sector-wise, PSU banks surged by 2.6%. You can see how sectors rotate on a day-to-day basis—yesterday it was the turn of real estate, today it was the turn of PSU banks, which have erased all the recent losses over the last three months. Now, PSU banks are flat on a three-month basis. What’s losing the most in the last three months is energy, public sector enterprises, and FMCG. FMCG is particularly struggling and refuses to go up. You can see FMCG languishing on a 1-day, 1-week, 1-month, and 3-month basis, which is a very big concern. FMCG not doing well does not bode well for the economy. This is a very big concern going forward.

Sectors of the Day

Nifty PSU Bank Index

PSU banks are in fine form, with smaller banks like Union Bank of India, Bank of India, Canara Bank, and Bank of Baroda all running up the index, which is doing up by 2.6%.

Stock of the Day

HEG

Graphite stocks were rallying hard today—Graphite India and HEG saw a big rally, with HEG India up by 14%.

Story of the Day : death and taxes, the only certainties in life.

This is of course the eternal truth, you can’t deny it. But what is happening now is that there were expectations that, given the slowing down of the economy (as the recent GDP numbers have shown), the government would have applied their mind and not try to stifle demand. The worst thing you can do in a slowing economy is to increase taxation, even if it’s on larger or more luxury items. I don’t understand why items like clothes, watches, handbags, etc., are always clubbed as “sin items.”

The bombshell in the news is the potential tax increase on tobacco and aerated drinks—28 to 35% on cigarettes. It seems like the government is trying not to give up any tax revenue. They are reducing taxation on insurance and trying to make it up at other places. I don’t know why this has to be a zero-sum game. Why can’t we reduce taxation and encourage more demand in each sector? Cigarettes and aerated drinks could still be placed in the highest bracket, but creating a new 35% bracket is creating a lot of fear. Right now, this information is based on source reports from the blue channels, and there is no official confirmation yet. But the fear is that once a slab gets created at 35%, a lot of items that are currently taxed at 28% could move into the 35% bracket. For example, items like luxury watches or cars could get taxed more under the same reasoning.

This mentality of penalizing premiumization in the economy is a very anti-capitalist approach. If the government keeps creating new slabs and imposing more taxes, it will push people to look for other ways to circumvent taxes. This is going against the ease of doing business, and it’s hard to believe such policy decisions are beneficial for the economy in the long run. If the policies continue this way, we will see more and more people leaving the country. Entrepreneurs, capitalists, and businesses will go to more tax-neutral regimes, and then we’ll lament about how the brains and capital of our country are leaving.

We do have a problem with abject poverty, and we do need to have subsidy programs. But continuing these subsidy programs for years, even when they are no longer needed, creates a massive drain on resources. This politics-driven policy approach is leading to a mismatch in economic decision-making. The government should be focused on reducing inefficiencies and leakages, cutting excessive ministries, and taking a practical look at what needs to be done with taxpayers’ money. The idea of a “Doge Ministry,” as under President Trump, could be a good model to streamline things.

The Laffer Curve exists for a reason. If the finance ministry does not understand that continuing to raise taxes will eventually lead to diminishing returns, then they are not doing a good job. If people feel they are overtaxed, they will stop paying taxes. This could take us back to a situation where businesses are again forced to defy taxation. That would not be a healthy environment for any economy.

India Inc. is slowing down, and FMCG, as mentioned earlier, is really taking a beating. The FMCG index is exactly where it was a year ago. There has been no major change, and it has underperformed the Nifty for the past four years. This signals that FMCG, a key indicator for economic growth, is not doing well. If FMCG doesn’t grow in India, then it’s hard to expect any major growth in other sectors.

In summary, we need a consumption booster. The outcry on social media over the last 24 hours shows that people are hurting. These vote-bank-driven policies are going to have their impact. At some point, if the government keeps squeezing taxpayers, the benefits will evaporate. The country needs to focus on boosting consumption and reducing roadblocks for demand. If we don’t do that, the economy will continue to suffer.