What will be the impact of budget on equity and debt markets?
On equity front, there were some positive announcements like labour law reforms, PSU Bank recapitalisation, big push for affordable housing and Electric vehicles but there was no significant reform measures to boost corporate India profitability. Increasing the public holding in companies is a near term dampener but a good measure to attract long term capital to India. Since rates have cooled off and eventually corporate borrowing cost is likely to come down, there will be inherent boost to the economy in coming quarters.
Borrowing externally can reduce the crowding out impact but this involves currency risk too. Since the expectation of growth picking up in a hurry is not there post the budget, inflation will be under control and also the spread between 10 year g-sec yield and corporate bonds to narrow. Near term domestic liquidity will improve and interest rates will have a downward bias which is positive for debt markets.
Here are the announcements, which will have a positive impact on equity markets:
- Easing funding for high quality NBFCs. It will increase liquidity and their funding ability
- PSU banks recapitalisation of Rs. 70,000 crore may result in some credit offtake
- Push to affordable housing and road transport are likely to create jobs
- Real estate sectors and electronic vehicle manufactures may benefit from tax incentives
- Compulsory 35% public holding in listed companies will ensure free float market capitalisation as many top listed companies currently have around 75% promoters’ holding
How have the markets reacted to the budget?
There has been some knee-jerk reaction in equity markets post budget announcement. The Sensex fell by more than 400 points, as there were no major announcement for boosting private capex. Meanwhile, the debt market reacted positively and as a result, the 10-year g-sec fell to 6.56% from 6.75%.
Sectors, which will gain & lose after the budget?
Auto sector may see some pick-up as NBFCs, which traditionally provided funding to auto sector may see increase in liquidity. Consumption theme may also benefit from government’s focus on welfare schemes.
Oil marketing companies (OMC) may face some stress, as they may not be able to increase prices immediately. The finance minister announced Rs. 1 increase in cess and Rs. 1 increase in excise duty on petrol and diesel which is a dampener for many user industries also.
Overall, we are bullish on private banks, consumer discretionary, beneficiaries of affordable housing, good quality companies which are forced to increase public holdings, pharma and select consumer staple companies.Incrementally we are bearish on OMCs and IT companies, as rupee will have a positive bias because of foreign flows from sovereign bond issuances outside India. Potential inflow of capital into listed companies because of changes in public holding also can impact INR positively.
How will you position your portfolio keeping in mind the budget
Our multi cap fund portfolio is fairly positioned with a long term mindset; we will continue to maintain our overweight and underweight bets.
On debt side, our liquid scheme has invested only in low duration high quality papers. There will be no change in positioning in its case too.
Your take on fiscal deficit target
We find the fiscal deficit target of 3.3% a bit ambitious as the government has factored in an 18% increase in corporate tax in its calculation, which looks difficult. We all know that corporate tax collection was flat last year and hence, the current fiscal target seems aggressive.
What returns should investors look at?
Over a long term, equities tend to generate returns in line with the long-term average, so over a 5-year period, equity markets have a potential to generate 15% CAGR returns.
