This is what a bull run feels like

The initial public offer (IPO) of Avenue Supermarts, the owner of DMart, which is likely to be floated in the next few weeks, is expected to command a valuation of  18,000 crore, much higher than the earlier expectation of `7,000 crore

According to sources, domestic fund houses are queuing up to meet the company management, which has already conducted roadshows overseas. “I am hearing that the management is very selective in the kind of investors it wants to attract and hence is not giving meetings easily ,“ said an analyst with a leading insurance company .-from ET

Tax Googly on Unlisted Scrips

Private equity funds and holders of stock options were thrown into confusion by a Budget provision aimed at plugging a black money loophole, fearing that it could land them with a hefty tax bill. Those who acquired shares in unlisted companies after October 1, 2004, will have to pay 10% longterm capital gains tax if they hadn’t paid securities transaction tax (STT) at the time of purchase.

Currently, income arising from the transfer of long-term capital assets such as stocks is exempted from tax if the sale took place on or after October 1, 2004. STT, which was introduced that year, typically applies to listed stocks.

Revenue secretary Hasmukh Adhia sought to allay concerns regarding the measure. “We will come out with detailed rules to exclude genuine investments such as those made through initial public offer, foreign direct investment, Esops (employee stock options),” he said. The measures were aimed at preventing evasion of capital gains via investment in bogus companies. Pending the clarification, there is trepidation that a potent incentive that has helped fuel India’s startup economy could be undermine ..

“An unintended consequence of this rule is to potentially place an onerous tax burden on Esops — which represent the most powerful wealth-creation instrument that cash-strapped startups use to motivate employees,” said Gopal Srinivasan, chairman of the India Venture Capital Association (IVCA).

Punit Shah, partner, Dhruva Advisors, said the new rules will apply to all domestic investors, including promoters of unlisted Indian firms. “They would acquire shares either by subscription or in the form of any group restructuring and would not pay STT at the time of acquisition. But now they may have to pay long-term capital gains tax on exit even after listing of such shares,” he said.

Another announcement, hidden in the fine print, is the aim to collect more tax if shares of an unlisted company are sold below fair value. This may impact private equity investors who often sell stocks of closely held companies to other financial investors. For instance, if a share purchased at Rs 100 is sold for Rs 150, the 20% tax on longterm capital gains would be Rs 10 a share. But not if the taxman thinks that the fair value of the share is higher than Rs 150 — say, Rs 170. Here, the tax would be 20% on Rs 70 (and not Rs 50), thus raising the tax outgo to Rs 14 (instead of Rs 10) a share. –from ET

The biggest decision for investors in 2017

Probably the biggest decision for investors in 2017 is determining the direction of the US dollar.


Even more than getting your call on interest rates right, predicting the direction and trajectory of the dollar will be critical for asset allocation.


For the dollar bulls, the case for a strong currency is quite straightforward. Interest rates in the US are rising,with the positive carry on US debt assets only increasing. The Federal Reserve (Fed) is on a path of increasing rates, divergent from the Quantitative Easing (QE)-forever outlook of the European Central Bank and Bank of Japan. With Donald Trump signaling his desire for fiscal expansion combined with tax cuts, most experts are convinced that the direction in rates is only up. While the Fed has been slow and deliberate in raising rates till now, many feel we may see them now accelerate and over-deliver on rates. Janet Yellen has clearly no intention to be seen as being behind the curve.

There is also a possibility of a continued improvement of the US trade balance through higher domestic shale production. Falling trade deficits should be positive for the dollar at least in the short term.

Some of the changes being proposed by the republicans for the tax code may also cause currency appreciation. The proposed border tax adjustment should itself force the currency to move upward, as both importers and exporters adjust prices to factor in tax changes.

All of the above should argue for a pretty clear case for continued dollar strength.

On the bearish side, almost everyone is bullish on the dollar. It is a consensus trade. Also given the outperformance of dollar assets over the past few years, everyone has structurally overweighed the currency in their portfolios.

Trump is a mercantilist, favouring protectionism. There is very little ambiguity about his position on trade after the inauguration. A mercantilist is very unlikely to support a strong dollar. A weak currency is often the foundation of their economic strategy. Trump has already publicly complained in an interview to the The Wall Street Journal about the strength of the dollar. This is a very unusual position for a US President to take.

The dollar is also overvalued against almost every other currency using the purchasing power parity metric. The deviation is between 1 and 2.5 standard deviation from the long-term mean.

It is, however, equally clear that if Trump is serious about reviving manufacturing in the US, he cannot afford to let the currency strengthen further. It is already hurting corporate America, both earnings and competitiveness. Remember it is the rust-belt states in Midwestern US that brought Trump to the White House. This constituency wants a revival in investments and high-skill jobs. They want to “Make in America”.

A strong and overvalued dollar is unlikely to achieve Trump’s vision of “making America great again”.

Is there anything that the new President can do to make sure the dollar rally is short circuited?

He can lean on the Fed to delay its rate rises. The market currently expects three rate rises in 2017. The Fed has consistently delivered less rate hikes than consensus expectations over the past few years. If this pattern were to repeat in 2017, it would release some pressure on the currency.


The reality is that markets are positioned one way, very confident and complacent that the dollar is only going up. The reality is that the Trump administration is almost certainly in favour of a weaker currency.

If the dollar were to weaken, we may see a significant move upwards in EM assets and cyclicals. The biggest concern holding back investors in these asset classes is the fear over a strengthening currency.

The surprise of 2017 may well be that the dollar stalls and we see a surge in EM assets. In such a scenario, global asset allocators do not own enough of EM assets. Any upward move will lead to performance chasing, which can easily swamp the asset class.