LTCG tax, political tensions, US Fed, and more: Five reasons why Sensex tanked 509 points

Sensex today: The benchmark indices had a severe fall on Friday with the Nifty breaking below its two crucial support zones - 10,300 and 10,200 - in a single session. The Sensex settled at 33,176, down 509 points, while the Nifty ended at 10,195, down 165 points. Broader indices outperformed marginally, slipping over 1 per cent each. Market breadth, indicating the overall health of the market, turned negative. On the BSE, 1,763 stocks declined, 917 stocks rallied, while 168 stocks remained unchanged. 

Experts believe the long-term capital gains (LTCG) tax deadline of March 31 is weighing on the markets, while political uncertainty after Chandrababu Naidu-led Telugu Desam Party (TDP) walked out of Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) and negative trend in global markets on trade war fears added to the losses. Investors were cautious ahead of US Federal Reserve monetary policy too. 

"Market slid as investors continued to remain cautious amid current issues in US administration on global trade & domestic political uncertainties. Market is finding it difficult to consolidate at the support levels as volatility in global market brought the benchmark indices towards the 200-DMA. Selling was broad based, metal index lost its sheen while PSU banks somehow managed to get stabilised with a slight decline," said Vinod Nair, Head of Research, Geojit Financial Services.

Brokerages had a cautious view on the markets at the beginning of the March series, expecting the Nifty50 to dip towards 10,000. 

"On the upside, 10,600-10,650 will serve as a resistance, while on the downside psychological level of 10,000 can’t be ruled out," Edelweiss Securities in its rollover report. 

"Any breach of 10,000 mark will pave way for an immediate dip of further 100-150 points," it added. 

Here are five reasons that pulled the markets down today:

1) LTCG tax-linked selling:

Investors may have been selling stocks where they sit on profits in order to avoid long-term capital gains (LTCG) tax introduced in Budget 2018. Notably, the changes in LTCG tax will kick in from April 1 as the profits made until March 31 had been kept tax-free. 
 
“The new tax regime will be applicable to transfer made on or after 1st April, 2018, the transfer made between 1st February, 2018 and 31st March, 2018 will be eligible for exemption under clause (38) of section 10 of the Act,” the government the income tax department clarified earlier. 

2) Political tensions

Investor sentiment turned negative after N Chandrababu Naidu-led Telugu Desam Party (TDP) on Friday walked out of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA), days after two of its ministers quit the Narendra Modi Cabinet over the denial of special-category status to Andhra Pradesh. The move holds significance after BJP witnessed defeat in UP and Bihar bypolls.

However, Shankar Sharma of First Global said it will be too premature to react on political uncertainty. 

"General elections are 8-10 months away. Markets may react one month prior to elections, when the exit poll results come out, but in staying away from the markets because of political uncertainty is premature," he said. 

3) Global rout

Asian markets slid as reports of more chaos in the Trump administration tested investors’ nerves, already frayed by fears that US tariffs could hurt the global economy. European markets also opened weak. MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.2 per cent. Japan’s Nikkei was down 0.6 per cent. On Wall Street, the S&P 500 edged 0.08 per cent lower on Thursday, marking its first four-day losing streak of 2018. The Nasdaq Composite dropped 0.2 per cent.

4) US Federal Reserve policy meet

Markets remained under pressure as investors braced for next week’s Federal Open Market Committee (FOMC) meeting at which the US Fed is expected to raise interest rates. The dollar index, which measures the greenback against a basket of six other major currencies, was up 0.26 per cent at 89.937. After the data, Fed funds futures data showed a lower chance of a fourth rate hike this year.

5) Valuations expensive

The markets are richly valued too. The trailing 12-month price to earnings (PE) ratio is ruling at 23.30, while the 12-month forward PE is 18.7 times, an 8 per cent premium to the long-period average of 17.3 times.