Chris Wood astonished as capital gains tax hike fails to revive Nifty bears

When Finance Minister Nirmala Sitharaman announced capital gains tax hike for both long and short terms, many thought that all hell would break loose on the Dalal Street. There was a knee-jerk reaction initially but Sensex and Nifty managed to recoup losses and are now trading above pre-Budget levels. This strange resilience of the Indian stock market has left Chris Wood, Global Head of Equity Strategy at Jefferies, astonished.

"It will be interesting to see the extent to which those higher tax rates impact the booming asset management industry. For now GREED & fear is astonished again, as was also the case after the election, about the lack of any meaningful correction in response to the news. The listed asset management companies’ share prices have barely reacted to the Budget news," Wood said in his weekly newsletter.

In the Union Budget presented on July 23, Sitharaman hiked short-term capital gains tax rate from 15% to 20% and the long-term rate from 10% to 12.5%.


Ahead of the Budget, Wood had warned that in case the capital gains tax is increased materially, it will likely trigger a bigger correction than what occurred after the Lok Sabha elections on June 4.

However, the market has digested all the bad news — BJP's failure to obtain a majority on its own in the Lok Sabha and the tax hike. During the day, Sensex rallied over 1,200 points and was within kissing distance of beating its record high of 81,588 achieved in the pre-Budget rally.

Wood, known as an India bull in global market circles, noted that the Budget was devoid of populism as Sitharaman maintained capex growth at 17% and lowered fiscal deficit projection to 4.9%.

Jefferies’ head of India research Mahesh Nandurkar is now of the view that the government is "well on course" for a fiscal deficit lower than 4.5% next fiscal year.

Most domestic fund managers have retained their bullish outlook even after the capital gains tax hike with Motilal Oswal's Raamdeo Agrawal reminding investors that the Budget has raised only the tax while capital gains are intact.

"Steady earnings growth coupled with a low probability of major valuation de-rating imply steady capital gains. So what if the tax on the same is a bit higher? The party continues," he wrote in a column on ET.