What are the Budget expectations for Stock Markets?

Budgets and stock markets have had a long relationship. Normally, Stock markets tend to overreact to budget incentives. The proposed Budget 2018-19 may not have been hugely positive for the Stock Markets in policy terms. However, the markets will be looking for reforms related and a few tax-related triggers.

This may sound a bit strange but this budget could give a thrust to equity as an asset class. By focusing on reforms and the benefits of corporatization, the government has continued its pressure on non filers and non documented assets to bring into documented fold. That puts Stock Market at an advantage. Pakistan Stock Market - PSX performed exceptionally well to reach an all-time high of 53,124 points in May 2017 from 19,000 in May 2013 and its market capitalization reached almost $100 billion in 2018. However we witnessed a steep decline of more than 30% as a result of political ripple effects and implications of macro economic challenges. Also, the higher fiscal deficit is likely to be negative for stock market, which have already been going up sharply in the last few months. With current account likely to be under further pressure, that is the negative vote but look at the positive side. The massive allocations/incentives for agriculture and reforms initiatives are likely to have a multiplier effect on GDP growth. This is a lot more value-accretive for Stock Market. So at a macro level, Stock Market really do not have reasons to complain.

Stock Market Specific Measures:

·         With Holding Tax on issuance of bonus shares has been abolished.

·         Super tax to be reduced by 1% each year from FY19 onwards.

·         Corporate tax to be reduced by 1% for FY19 and will be reduced by 1% annually till FY23 for Non-Banking companies.

·         Tax on undistributed profits has been reduced to 5% from 7.5%. Moreover, condition of distributing 40% after tax profits has been relaxed to 20%.

·         Tax of 0.02% on commission earned by brokers has now been made adjustable, compared to previous.

All in all the impact of the Budget FY2018-19 on equity market would be 'Positive', while CGT and tax on dividend maintained. Overall Fertilizer, Textile and chemical to benefit while Banks, Oil & Gas to remain neutral and Auto and Cement to likely remain affect.

It is hard to say which way market sentiment would drive the Stock Market in current fragile political environment. But it needs to be underscored that this budget is significant in more ways than one!