Fed’s Dilemma and Market Reactions: Rate Cuts, Realty Tax Tweaks, and Key Stock Performances

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you are not ready for the markets.” – Peter Lynch

The Fed’s Hobson’s Choice

The buzz is around whether the US Federal Reserve will implement an emergency interest rate cut before its September policy meeting. Despite a brief rebound on Tuesday, US equities remain shaky. Proponents of an emergency rate cut, including Wharton’s Jeremy Siegel, are advocating for an immediate 0.75% reduction, followed by another 75 basis points in September, to avert a market collapse. However, others argue that the US is not currently in a recession and there is still time to stave off a downturn.

The bond markets are anticipating an emergency rate cut. Whether this will uplift equity markets is uncertain, as an unscheduled rate cut could signal that the economy is already in trouble. Additionally, a sudden rate cut is not a panacea; it could worsen inflation, which is already above the 2% target, and create unrealistic market expectations. If the economy does not improve despite the rate cut, a more severe sell-off could ensue.

Moreover, an emergency rate cut could complicate the yen carry trade by weakening the US dollar against the yen. Conversely, failing to act swiftly could leave the Fed unable to address deteriorating economic conditions, exacerbating the downturn. The Fed is indeed facing a Hobson’s choice.

Realty Tax Amendment in India

Domestically, the Indian government has proposed an amendment to property tax laws. The amendment allows taxpayers to choose between a 12.5% long-term capital gains (LTCG) tax rate without indexation or a 20% rate with indexation for properties acquired before July 23, 2024. This move aims to alleviate the concerns raised by stakeholders in the real estate sector following the original rule proposed in Budget 2024, which sought to eliminate indexation benefits.

Market Sentiment and Global Factors

Despite this amendment, it is unlikely to significantly boost market sentiment in the short term. Global factors will continue to dominate market dynamics, and current conditions are not favorable.

Key Stocks in Focus

Marico (₹630, -6.3%)

Bull Case:

• Marico aims to double its food portfolio and improve gross margins.
• Falling copra prices could lift margins.
• International business and consolidated topline are expected to achieve double-digit revenue growth.

Bear Case:

• Bangladesh, contributing 12% of Marico’s revenue, faces political instability that could impact the company’s topline.
• Intense competition and shrinkflation in low-unit packs (LUPs) could lead to muted performance in value-added hair oils.

LIC Housing Finance (₹652, -4.88%)

Bull Case:

• Management is optimistic about double-digit loan growth for FY25.
• Despite margin contraction, no further compression is expected as higher-yielding segments increase credit flow.

Bear Case:

• Competitive intensity from other banks could restrict loan disbursals.
• As most of the loan book is floating in nature, any rate cut by the Reserve Bank of India could lower earnings, as the interest earned on loans would decrease compared to liabilities.

Syrma SGS Technology (₹431, -7.6%)

Bull Case:

• Improved net working capital days to 62 indicate increased efficiency.
• Management’s long-term RoCE target of 15% remains on track.
• Higher asset turnover and reduced working capital intensity support the return profile.

Bear Case:

• Gross margin decline due to a higher mix of lower-margin consumer business, reducing EBITDA margin to 3.8%.
• The order book was broadly flat quarter-over-quarter.
• Medical and healthcare sectors saw soft performance. Exploring OSAT opportunities, but no significant progress yet.

Prestige Estates Projects (₹1,655, +2%)

Bull Case:

• The company recorded its best-ever pre-sales and collections in FY24.
• Planned ₹10,000 crore capex in annuity projects is expected to generate ₹3,300 crore in cash flows from FY28.
• Gradual expansion into other regions, such as Delhi, mitigates concentration risks.

Bear Case:

• Rapid expansion plans could sharply increase debt.
• A drop in demand or revenue could harm the company’s financial health.

Conclusion

The US Federal Reserve’s potential rate cut and India’s real  estate tax amendment are pivotal developments in the current economic climate. While the Fed’s decision remains uncertain, the Indian government’s tax tweak aims to address stakeholder concerns. Market sentiment, however, will likely be driven by broader global factors in the near term. Key stocks like Marico, Prestige Estates, LIC Housing, and Syrma SGS Technology are under close watch as they   navigate these turbulent times.

Tax Options for Realty Transactions