Coming into trade on Friday the bears would have been bracing for a historic fourth consecutive negative series for the Nifty which has happened only once before, in 2002. In cricketing parlance, the bulls needed to hit 250 odd points to avoid this feat and had just four sessions to do it in (before the September 26 expiry) until finance minister Nirmala Sitharaman took a leaf out of Donald Trump’s book and played a Ben Stokes-like knock that we witnessed in the third match of the recently-concluded Ashes series when the all-rounder stitched together an unbeaten 76-run tenth wicket partnership to clinch an unlikely victory.
After the finance minister's
announcements the Nifty ended up 550 points — its biggest single day gain in ten years. Post that rally MSCI India has turned into the green for 2019 although it is still underperforming MSCI Emerging Markets Index. 1. Impact on Nifty EPS and fiscal deficit Corporate tax cut will boost the profitability of companies, providing a fillip to earnings per share (EPS) estimates for the year. After Friday's announcements, Morgan Stanley has revised FY20 earnings estimate for BSE Sensex to 25 percent from 13 percent earlier.
The move will also have an impact on the government’s fiscal deficit target. The finance minister said that the government will forego Rs 1.45 lakh crore in tax receipts due to lower corporate tax rate and the impact of which could be 0.7 percent to the gross domestic product (GDP) this fiscal. The government in its July budget had given a fiscal deficit target of 3.3 percent of the GDP which could now head towards 4 percent.
According to market participants, the need of the hour was to recognise the economic slowdown and a measure like the one announced Friday will only boost sentiment on the street and reignite the animal spirits.
2. FIIs go from short to extremely bullish FII scorecard on Friday
Added 50,925 long contracts on index futures
Bought 40,643 call contracts on index options
Wrote 40,944 put contracts on index options
On Thursday, the foreign institutional investors (FIIs) were long on 25 percent of index futures and short on the remaining 75 percent, however, the equation dramatically changed after Sitharaman’s announcement as their long bets climbed 14 percent to 39 and short was down to 61 percent.
FII positioning on index futures
FII positioning on the index was aggressively short and short contracts were at the highest for the past many months. On Friday, they began covering some of these short positions with nearly 7,800 short contracts being covered and around 51,000 long contracts being added. In percentage terms, the total long positions went up by 83 percent on a day-to-day basis though on a very low base. Considering we are heading into expiry week of September series, one could see a short squeeze as FIIs have been net short on index futures throughout the series.
On options buying side
FIIs bought more than 40,000 long call contracts which translates into a 25 percent addition on the long call contract side. On Friday, FIIs bought five calls for every one put bought. Overall though they have bought more puts than calls as a cushion in-case markets were to head higher.
On option writing side
FIIs were writing puts aggressively on Friday and added nearly 41,000 short puts which indicates they now believe Nifty has made its low of the series. On Friday, they wrote more than two puts for every one call written though overall they have still written more calls than puts.
3. Correlation between market returns and FII flows
History suggests a strong positive correlation between market returns and FII flows. In the 15-year period over CY04-18, FII flows were positive in 12 calendar years with just CY08, CY11 and CY18 witnessing outflows. Of these 12 years, Nifty delivered positive annual returns on 11 occasions with CY15 being an exception. In CY19 we have a revival in FII flows with year-to-date flows at $6.5 billion despite an outflow of around $4.8 billion since July 2019.
Domestic institutional investors' (DIIs) ownership of Indian equities has increased from 10.5 percent in March 2014 to 13.3 percent in September 2019, while FII ownership has inched down marginally from 21.8 percent to 21.3 percent over the same period. A pick up in FII flows can push Nifty back towards the all-time peak of 12,103 mark.
4. FM cut Taxes last in 1997. What happened then?
The then finance minister Many would argue that these measures do not directly address the consumption slowdown that India is currently facing as it does not leave more money in the hands of a consumer but a move like this is more structural in nature. Corporates now have the option to either plough back savings in to investments or slash prices to revive consumer sentiment.
P Chidambaram lowered the maximum marginal income tax rate for domestic companies to 35 percent from 40 percent. Nifty reacted positively and jumped 13.4 percent in the next four sessions. Remember, the Nifty was then at 1,000 pints while today it is above 11,000.
Stay tuned and fasten your seat belts as we could be in for a ride up, up and away!