Vijay Kumar Gaba

In my view, the stock market outlook in India, in the short term of one year, is a function of the following seven factors:

 In my view, the stock market outlook in India, in the short term of one year, is a function of the following seven factors:

 “No one was ever lost on a straight road.”

 One of the most common narratives in all the investment advisory pitches is the impact of inflation on investors’ wealth. Inflation is often termed as termite that silently destroys investors’ wealth. Protecting wealth from inflation is therefore one of the primary objectives of almost every investment strategy.

Over the weekend I examined more than twenty-five investment proposals, mostly focusing on elevated inflation and its impact on real returns. The common advice is to take higher risk by increasing the proportion of high yielding debt and equities.

Discussions with investment advisors indicate the investment strategies aimed at protecting the real (inflation adjusted) value of the investors’ portfolios may be based on poor, and often wrong, understanding of the impact of inflation on investors. Most of them presented the official data of inflation and suggested investment products that may yield a return that is higher than the official CPI (Consumer Price Index) inflation.

None of the 20 odd investment advisors I spoke with has considered that inflation is a very personal phenomenon. Every investor may have a different inflation number to deal with. The official CPI inflation may be of little relevance for a majority of household investors. The inflation affects rural and urban investors differently. The inflation also varies according to the State, an investor lives in and incurs most of the expenditure. The impact of inflation on investors’ wealth could be different depending on his consumption pattern and saving propensity.

·         The inflation rates for various states are different. In March 2023, West Bengal CPI inflation was just 4%, as compared to national average of well over 5% and Tamil Nadu inflation of 7%. Investment strategy for investors living in Kolkata and Chennai need to account for this difference.

·         The weightage of different states in calculation of CPI is also different. Maharashtra has a weightage of 13% (8% rural and 19% urban) in overall CPI basket; while Bihar has a weightage of 5%. Obviously, the investors in Patna and Mumbai face different inflationary impact; and their investment strategies to fight inflation need to be different.

·         The weightage of food and beverages in rural CPI basket is 54%, while in urban basket it is 36%. The combined basket has a weight of 46% for food. Obviously, food inflation impacts rural and urban investors differently. Rural basket has 3% weightage for Pan, tobacco and other intoxicants while urban basket has a weight of 1% for this. Similarly, the weightage of education, health and dairy consumption also varies sharply for rural and urban consumers.

·         The official CPI basket does not account for the inflation in housing and rental cost, which could be a significant expenditure for many investors, especially in urban areas.

·         One of the most important aspects of inflation consideration in investment strategy should be the saving propensity of the investor. An investor which is able to save 60-70% of his income cannot be put n the same bracket as an investor who saves just 10-20% of his income.

·         The investors who have significant debt and use most of their savings to repay the debt may have a self-neutralizing inflation. Similarly, an investor engaged in a money lending business might be much more severely impacted by inflation than investors who have significant borrowing.

·         A 70yr old investor with independent children, who consumes less cereals, education and transportation and more healthcare will have very different inflation impact as compared to a 40yr old investor with school going children and dependent aged parents will have remarkably different consumption basket and therefore inflation impact.

The point is that the impact of inflation is usually different for various investors depending on their individual circumstances and status. Therefore, investment strategy needs to be personalized for all investors, or at least class of investors. Selling the fear of inflation and making them invest in products which are benchmarked to official CPI may not serve much useful purpose for most of them.

Investors also need to understand their inflation profile and accordingly adjust their investment strategy.

         

 Largely as expected; capex sustainability core focus (Phillips capital)

Budget fared well across categories – prudent fiscal position, steep rise in capex allocations, continued focus on sustainability, Atmanirbhar Bharat, and social upliftment.

Capex budgetary allocations have risen sharply in FY24 (up 37% vs. 23% in FY23); including IEBR, growth stands at 32%/10% in FY24/23. Incremental capex allocation in FY24 is highest for railways, roads, infra spending by states, and energy; defence and housing are muted; additional allocation of Rs 550bn has been made towards OMCs and BSNL capital infusion.

Sharp drop in food and fertiliser subsidy (Rs 1.6tn) is in the expected lines. MNREGA allocations have also see a sharp decline to Rs 600bn vs. Rs 894bn in FY23RE.

Fiscal deficit for FY24/23 is in line with our expectation – at 5.9%/6.4% of GDP; gross/net borrowing expectedly remains elevated at Rs 15.4tn/11.8tn, marginally higher vs. FY23. We expect this to keep yields elevated in the near future until clarity emerges on RBI rate reduction path (likely by Q3-Q4 FY24). State fiscal deficit limit has been set at 3.5% (including 0.5% for power sector reforms). Tax/GDP ratio at 11.1% bakes in all optimism, we expect marginal slippage considering likely economic softness in FY24. Revenue  expenditure/disinvestment targets are realistic, marginal slippage also expected under non-tax revenue.

Strategy

Buoyant public and private capex keeps us positive on the investment sectors (capital goods, railways, cement, logistics; defence is a tad soft – as expected) more than the discretionary segments. We are also positive on the agriculture space, government’s focus on raising domestic production, and eventually encouraging exports – is a long-term positive for rural income. Near-term, we are not positive on rural demand, FY24 allocations not encouraging.

Union Budget FY24: A Fixed Income and Macro Perspective (IDFC Mutual Fund)

Central government gross borrowing through dated securities is estimated at Rs. 15.4 lakh crore in FY24, well within market expectations, after Rs. 14.2 lakh crore in FY23 which was also devoid of any surprise. States’ borrowing could pick up in FY24 in line with potentially mildly-higher fiscal deficit, higher SDL redemptions and a possible shift from the pattern in FY22 and FY23 of a consistent undershoot the borrowing calendar. This implies consolidated (centre + states) gross borrowing, moving up each year after moderating from the peak in FY21, could now rise beyond FY21 and well above pre-pandemic borrowing (Figure 4). Even net consolidated borrowing as a share of GDP will be 1.1ppt higher than FY20 (pre-pandemic). Total outstanding government liabilities remain high at 82% of GDP at end of Q2 2022, after rising to 89% of GDP in FY21 and FY22 from 75% in FY20.

However, the central government is now in a position such that if nominal growth is in the 10-11% range and expenditure does not rise sharply in FY25 and FY26, it could well be on the fiscal glide path and get to below-4.5% fiscal deficit in FY26.

Strategy

While gross borrowing announced today has positively surprised versus market expectation, the standalone number is nevertheless a significant one. We expect the yield curve to steepen further somewhat, especially over the latter part of the year when market may have better line of sight on whatever modest rate cuts to expect if at all down the line; assuming a soft-landing scenario for the developed world.

The environment for fixed income is decidedly getting more constructive given better macro stability, terminal policy rates in sight, and the consequent fall in global bond market volatility. This argues for somewhat higher duration in active funds than before. At any rate one has to compensate for the ‘roll down’ effect on portfolio duration that happens when one is passively holding the same set of bonds. For these reasons, and keeping consistent with our underlying view, we have expanded our consideration set to 3 - 6 year maturity bonds; a marginal tweak from 3 - 5 year maturities before.

Pragmatic budget with focus on Growth and Macroeconomic Stability (Canara Robeco)

Budget has managed to create investment acceleration without damaging other expenditures. This was a modestly positive for equity markets. Consistent key positive for economy has been that Govt has been trying to focus on productive spending within constraints of resources over last 8 years.

Strategy

Budget is modestly positive for Industrials, Banks and both FMCG and non-FMCG discretionary consumption. Equity market will move back to two key factors from tomorrow, the earnings (season) and cost of capital (interest rate outlook globally). We think that both these factors are neutral to negative for us from near term perspective and thus market will continue to consolidate till we get visibility on earnings upgrades or substantial decline in interest rates (Inflation globally/locally) to change multiples. India trades at premium to other Ems and thankfully that is correcting with the consolidation over last 1 year. Indian equity market trades at 19xFY24 earnings – with earnings CAGR of 13-14% over FY23-25E – in a fair valuation zone from near term perspective.

Marching ahead on sustainable growth path (JM Financials)

The main focus area of Budget FY24 was on capex, with a substantially higher allocation of INR 10tn (33% YoY) while adhering to the fiscal consolidation path. The fiscal deficit target is set at 5.9% of GDP for FY24, but the way forward to FY26 would be steep.

Capex target for FY23 missed slightly (INR 7.3tn vs INR 7.5tn FY23BE) as states could not undertake the capital expenditure. The revenue growth assumptions (10.5% YoY) look optically conservative since it is on a higher base of FY23. However; over the FY23BE figures, the revenue growth rate comes to 22% which is quite stretched.

Strategy

We have a constructive view on the markets and we believe that the high allocation towards capex and schemes like PM Awas yojana are likely to benefit real estate ancillaries like cement and building materials while companies in the industrial space are the clear beneficiaries of the governments capex push.

Capex boom all the way (Yes Securities)

Continuing from the previous years, this Budget is a futuristic blueprint that seeks to harness the full potential of the economy through universal development and to touch the lowest income pyramid with inclusive policies. Impetus for job creation and macro stability remains the economic objective of the Budget making exercise. To improve the future productive capacity of the economy, effective capital expenditure has been increased to 4.5% of GDP or INR 13.7 tn, with outlay for railways and roads respectively up by 50.0% and 25.0% respectively over the FY23RE.

We see the budget maths as being rational with the nominal GDP growth assumed at 10.5% and laud the government for being able to stick to a consolidation plan at 5.9% GFD/GDP in FY24BE from 6.4% in FY23RE.

Strategy

The yield curve has flattened out significantly as the RBI has sharply increased the short-term rates. We see some scope for the yield curve steepening once again while holding the short-end of the curve. Tighter liquidity, larger general government issuances along with probable increase in the corporate bond issuances could be the factors behind steepening of the G-sec curve.

As in most years, we see the central government front-loading its borrowings into H1 FY24, thereby creating a possibility for the 10-year G-sec yields to rise to around 7.60-7.75% in that period.

Critical would be the demand from the insurance companies to clear the market supplies. We note that the incremental buying of the insurance companies in H1FY23 is lower than in H2FY22. The demand for guaranteed returns insurance policies could also die out as banks have raised their deposit rates now and tax arbitrage at higher end of term premia is done away with in this Budget.

Balanced Budget With Capex Led Growth (Kotak Mahindra AMC)

❖7% Growth expectation for FY23 looks Conservative

❖Focus on 3G

•      Growth - Fiscal consolidation & Infrastructure spending

•      Governance - Improving Tax Compliance

•      Green - Energy independence through green energy

❖Higher spending on Infrastructure than expectations to help Capex and Growth

❖Consumption to get a boost - Tax cuts

❖Multiplier effect on growth by pulling in private investment

❖Achievable divestment target of ₹ 610Bn

Strategy

❖Equity/Hybrid:

•      Indian Markets trading at a premium to other Ems

•      It’s a Buy on Dips Market

•      Allocate via Hybrid Funds such as Balanced Advantage & Multi-Asset Funds

•      Conservative investors can consider Equity Savings and Conservative Hybrid Funds

•      Exposure to Equity Funds preferred via SIP route

❖Fixed Income:

•      Market Linked Debentures will be taxed as Short Term Capital Gains at applicable rates. This will bring it at par with Debt Mutual Funds

•      Yield curve has flattened in the last 1 year, 3-7 years segment of the curve looks attractive

•      Short/ Medium Duration & Dynamic Bond Funds can be considered

•      Some allocation to Long Duration Funds can be considered in case the long-term yields harden further

Consistent, Credible and Prudent (IIFL Asset Management)

In line with the past few budgets, the government maintained its focus on capital expenditure to improve long term growth potential. While the headline capex growth seems higher (37% growth YoY), the adjusted budget spends are still higher by 25% YoY post internal adjustments, which is commendable. Further, a larger proportion of the capex has been provisioned for the central government (against spends by states and PSUs), which should result in better execution.

The FM maintained the trend of projecting realistic and achievable estimates, leaving the potential for an upside surprise if there is a pickup in economic activity. Tax revenues are projected to grow at 10.4% (vs 12.3% in FY23). Divestments targets also seem achievable at INR 610 bn (vs INR 600 bn in FY23). Improvement in global activity and peaking of interest rates could lead to upward revisions and lower deficits compared to projections.

Strategy

We maintain our focus on creating a balanced portfolio with a mix of companies which are likely to – experience structural growth or benefit from the economic turnarounds. In terms of sectors, we see interesting opportunities in Private Sector Financials, Consumer Discretionary, Industrials and Materials to participate in the domestic economic recovery.

We continue to maintain an overweight exposure to the secular segment (31% portfolio vs 21% for benchmark) and remain underweight in value traps (20% vs 31%) across most of our portfolios. Our portfolios are also overweight cyclicals (22% vs 16%) vs defensives (25% vs 32%), we expect this trend to continue in the near term.

Growth support; fiscal consolidation (DBS)

The central government’s FY24 Budget was growth supportive whilst sticking with a

modest glide path for consolidation. The underlying math was reasonable as it factored

in the upcoming moderation in nominal GDP growth, and lower tax buoyancy, whilst prioritising long-gestation capex spending.

Accompanying sectoral announcements were a mix of tweaks to the personal income tax brackets (to provide support to the salaried class), changes in custom duties to support local manufacturing, and targeting green transition goals, which was balanced by higher allocation towards MSME credit guarantee schemes, skill upgradation and other inclusive welfare goals. The medium-term path of further fiscal rationalisation remains in place as the government reinforced its target of lowering the deficit to -4.5% of GDP by FY26.

Strategy

The high contribution of small saving scheme might be at risk as banks continue to offer competing deposit returns. Looking ahead, market conditions might be less conducive in FY24 on account of a narrower liquidity balance, squeeze on banks as credit growth continues to outpace deposit generation hurting incremental demand for bonds as well as limited progress on global bond index inclusion plans. This increases the likelihood that the central bank might show its hand via open market operations in the course of the year to contain unexpected volatility.

 In the next couple of days, the market participants world over will be focused on the FOMC statement on Fed rates, inflation & growth outlook and guidance for the monetary policy direction in the near term (next 3-6months). The “active” market participants in India, in particular, would be staying awake till late midnight on Wednesday to hear what Fed Chairman Jerome Powell has to say.

The fact that Thursday happens to be the monthly derivative settlement for July contracts, makes the Fed decision, and likely reaction in our markets on Thursday morning, even more pertinent for the derivative traders in India.

Besides the derivative traders, the currency traders; bond traders and corporate treasury managers who need to actively manage their Fx exposure, would also staying awake to see how the US Dollar, EUR and US Treasuries behaves post the FOMC statement and try to assess how Indian bonds and INR may react in near term.

Our markets may however be relieved to a great deal if the RBI makes an unscheduled rate decision on Wednesday morning itself, just like it did on 4 May 2022, preempting the pressure on Indian bonds and INR post FOMC decision. For records, in his recent statement, the RBI governor has already spoken about the inevitability of further rate hikes. It would be better if it is done tomorrow rather than a week later (04 August 2022) when the MPC of RBI is scheduled to make a statement on monetary policy.

The European Central Bank (ECB), for example, hiked 50bps last week – their first hike in 11 years- to preempt further slide in the Euro. ECB hiked despite signs of accelerated slowdown in growth and rising fiscal pressures on peripheral Europe.

Since the FOMC decision would be known in less than two days, I do not find any need to speculate on the likely outcome and the market reaction to that outcome. Nonetheless, it would be appropriate to say that the market is pregnant with the hope of a unambiguous ‘pause’ signal from the Fed and consequent weakness in USD and a rather dovish MPC. The chances of disappointment are therefore marginally higher than the chances of positive surprise, in my view.

What should be the strategy of an investor under these circumstances?

In my view, the first thing an investor should do is to have a good dinner on Wednesday; go to bed early and not watch the markets, including business newspapers & TV channels and investing handles on social media, on Thursday.

Second, investors should focus on performance of the companies in their respective portfolio, rather than bothering too much about the general impact of global macro developments. They should assess the ability of the companies in their portfolio to manage the impact of rate and currency volatility on their respective businesses. The history indicates that better managed companies in India have managed this volatility very well without letting it materially impact their performance beyond a couple of quarters in the worst case.

Third, if the change in global rate and currency outlook materially alters the investment argument for a company in their portfolio, they should place a “sell” order for it today itself.

In my past couple of strategy reviews, I had noted that given the present circumstances, the market outlook is pretty simple and straightforward – Moderate return expectations and focus on capital preservation. In fact, in the past three months the investment environment has become much more uncertain and complex. The geopolitical uncertainties, fiscal policy fatigue and monetary policy dilemma make short term forecasts very complex. These factors further support the idea of keeping the investment strategy simple and continue giving preference to capital preservation over higher returns.

I continue to believe that the economic and market cycles are now becoming much more shallow as compared to the 80s and 90s. The recessions nowadays last for a couple of quarters, not many years. Inflation peaks at 7-8%. Despite all the brouhaha over unprecedented QE and uncontrolled inflation, US rates are expected to peak at 3%. In fact the bond market in the US may already be pricing in a reversal of monetary policy and beginning of a rate cut cycle in 2023. In India also bond yields are expected to peak around 7.5% despite higher fiscal deficit and high inflation.

The market corrections (except the knee jerk reaction to pandemic led lock down) are also shallow and short lived. Unlike in the 1990s and early 2000s, we no longer see 20% plus correction in benchmark indices more frequently now.

The point is that defining market outlook and defining an investment strategy on the basis of that must factor in the new trend of shallow cycles. Relying on historical data of deep cycles may lead to unsatisfactory results.

Market outlook

The market movement in the first half of 2022 has been mostly on the expected lines. Despite the ongoing conflict between Russia and Ukraine, and elevated energy prices, I do not see any reason to change my market outlook for the rest of 2022. I expect-

(a)   NIfty 50 may move in a large range of 15200-18600 during 2022. It would be reasonable to expect 10% + 2% return for the year for diversified portfolios.

(b)   The outlook is positive for IT Services, Financial Services, select capital goods, healthcare and consumer staples, and negative for commodities, chemicals, energy and discretionary consumption. For most other sectors the outlook is neutral.

(c)    Benchmark bond yields may average 7.25% + 30bps for the year. Longer duration may do better in 2H2022.

(d)   USDINR may average close to INR77/USD in 2H2022. Higher yields may attract flows to support INR.

(e)    Residential real estate prices may show a divergent trend in various geographies, but may generally remain stable. Commercial real estate may remain best category

Investment strategy

I shall continue to maintain my standard allocation in 2022 and avoid active trading in my equity portfolio. I am further downgrading my target return for the overall financial asset portfolio for 2022 to 7%.

Equity investment strategy

I would continue to focus on a mix of large and midcap stocks. The criteria for large cap stocks would be growth in earnings; while for midcaps it will be a mix of solvency & profitability ratios and operating leverage.

Debt strategy

I will continue to focus on accrual strategy for my debt portfolio. In case the yields spike beyond 7.75% due to policy rate hikes by RBI, I would lock-in my mid-term funds (3 to 5yrs) in long duration bonds/funds.