By Vinay Kumar Gupta
It is a budget time and the countdown for the Union Budget 2022-23 has started. If the pandemic doesn’t create havoc on the budget day, then Finance Minister Nirmala Sitharaman will most likely present her fourth Budget on February 1 this year.
Last year, the government announced various stimulus and these stimulus packages have provided a much awaited pathway for a strong recovery but has also resulted in soaring inflation. The US Federal Reserve already signaled a hike in interest rates and RBI may also be contemplating about hiking rates and tightening liquidity from the financial system.
With increasing Covid cases due to a new variant of concern, the Indian economy would be having a bumpy ride ahead. As lockdowns and restrictions would be imposed, the real estate sector is expecting the government to increase capital outlay. Thereby, the budget is expected to provide a push to both affordable and rental housing ecosystems as well as bolstering existing financial infrastructure so as to provide liquidity to stuck real estate projects. On the similar lines, it is expected to focus on the infrastructure space so as to increase employment potential of this sector.
The hospitality sector is seeking lower taxes and incentives in terms of offering interest-free loans, subsidies and reduction in tax rates. In the budget, announcements are likely to be made regarding education. Government could provide tax relief for Covid patients and their families and more deductions for the expenses on medical treatment. Insurance industry wants GST on the health insurance to be slotted in the 5% from existing 18% GST and apart that micro-insurance, sachet products etc. to be exempted from GST. Allocation would be more for Highways authority from the government kitty. For this government needs to push its disinvestment agenda with full force so that the government should have sufficient liquidity to support & to sustain this massive capital expenditure, push consumption demand and restore confidence in the banking system.
Indian Equities have delivered steller returns of around 32% from January to October this year in FY21 on account of favorable macroeconomic environment, the Government and central banks policy stimulus, strong corporate earnings and inflows from retails and institutional investors. These factors have helped Indian stock markets to outperform against its peers. But as the year ended, the tide turned against the Indian equities. As a result, Indian markets have already corrected 8-9% from it’s all-time highs from October to mid-December.
Emergence of the highly transmissible – omicron variant could play havoc in the economy recovery plans coupled with Fed hawkish policy instances, the market is now bracing for interest rate hikes and on the brink of some short-term softness. So a key question is whether investors should run away or invest more amid correction. Amid turmoil in the financial markets, there are certain pivotal events to look out for first and foremost, how contagious is this new variant of Covid. Second being tapering – rather a pace of tapering from the US & other central banks. Third major event in this line would be the upcoming Budget of FY23.Thereafter, all eyes on what monsoon has for us in store.
From a medium to long-term viewpoint, the current correction along with increased corporate earnings in upcoming quarters would give a good platform for better future returns. From a top-down perspective, we can bet on export-oriented sectors ranging from technology to chemicals. Covid recovery could benefit sectors like travel, hospitality etc. On the industrial front, companies with order book visibility, lean balance sheets with minimum leverage, and companies gaining from Atmanirbhar Bharat & PLI schemes, should be on the radar. Riding on recovery, digitalization and better asset quality mix would lead financials to manage the pressure on their interest margins. The unprecedented demand for digitization and the gradual easing of talent shortage, robust order book augur well for technology players.China+1 policy, diversification of supply chain and strong domestic demand will be highly beneficial for the chemical industry story. Increasing healthcare expenditure and rising domestic and export demand will keep pharma growth trajectory on track, reductions in excise duty and state value-added tax on petrol and diesel would also support consumption demand. Disinvestment in PSUs space would be a value unlocking proposition.
Overall, we are not expecting any major negative earnings impact on Nifty in the next couple of years, as the two heavy weight sectors – namely financials and technology look fine. From the above discussion, it is crystal clear that long-term growth prospects of the Indian equities are still promising. It is recommended unequivocally that investors should use this opportunity to buy on dip strong fundamental stocks at reasonable pricing. Investor could keep following shares on radar for instance, Wipro, HCL Technologies, Tech Mahindra, HDFC Bank, ICICI Bank, KPR Mills, Fineotex Chemical, Aarti Industries, Tata Power, Olectra Greentech, KNR Construction and PNC infratech etc.
(Vinay Kumar Gupta is Director at Trustline Securities. Views expressed are the author’s own.)