Budget 2019: How should investors trade ahead of budget

Updated: June 28, 2019 5:08:35 PM

Union Budget 2019 India: The major expectation ahead of the budget is that Modi 2.0 could provide stimulus to revive consumption and investments.

Budget 2019, Union Budget 2019 India, Budget 2019 India, Budget 2019-20, stock market strategyUnion Budget 2019 India: On the investments side, enhanced infrastructure outlays might continue to offset the marked absence of private sector investments.
  • By Rajesh Cheruvu

Union Budget 2019 India: The major expectation ahead of the budget is that Modi 2.0 could provide stimulus to revive consumption and investments. Stimulus to consumption could be seen from the rationalisation of taxes, banks’ recapitalization and reinvigoration of NBFCs which would boost spending power of the consumer. On the investments side, enhanced infrastructure outlays might continue to offset the marked absence of private sector investments.

Expect five areas of reforms to fix structural deficiencies faced by the country to help revive economic activity and job creation:

Bring all the prevailing labour laws under unified labour code by removing multiple, conflicting and redundant age old laws and adopting global practices to reflect needs of contemporary times. Job creation is undisputedly the need of the hour, and the government might offer fiscal incentives for adding new capacity by industrial units as well in economic zones for “Make in India” initiative. In this light, companies dealing with staffing solutions services appear attractive.

Public sector banks needs to play a vital role in reviving economic activity through easing credit conditions.  For this, banks need to be capitalized adequately. Higher allowance of Indian debt to foreign investors may help bridge the gap between demand and supply and could help soften bond yields. Capitalisation of NHB and SIDBI could also be on the table to meet current refinancing needs of housing and SME sectors.

Also read: Budget 2019: PSU bank recap may be key focus area for Nirmala Sitharaman

Investment overlay enhancements can be considered to be imperative to overcome subdued rural income growth and related spending distress. In continuation to the interim budget allocation, government could increase allocations into rail, road, port infrastructure and housing sector. This has prompted us to tilt towards Construction Materials and Home Improvement sectors like Cement, Paints, Adhesives, Plywood, Tiles and Pipes.

Room for tweaking of personal tax rates appear limited though the limits could be hiked marginally to encourage consumer spend. Stimulus to consumption, though, could be given by way of tax relief to discretionary and non-discretionary consumer segments by GST council in coming weeks.

Given the ongoing growth concerns, tax revenues could continue to disappoint sequentially for a second year. In that context, non-tax revenues hold key for government finances. In interim budget, the government has envisaged INR 900bn from disinvestments of PSUs and INR 1.3trn from dividends, which appears to be steep. However, flexing the grip on fiscal prudence might not be necessarily be seen harshly by markets, given the weak macro backdrop and that stimulus appears to be the need of the hour. Budget will give direction to alternative plans to garner resources. This would have implications on PSU stocks and bond yields.

Net-net, steadily building portfolios to average out the market volatility with a focus on the Construction Materials and Home Improvement sectors, along with Consumption and select Financials owing to the recent sell off seems a prudent approach to trading and investing ahead of the Budget.

The author is CIO(Chief Investment Officer) of Validus Wealth. The views expressed are the author’s own.

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