No Bad News = Good News!!
The Union Budget 2022 was presented on 1st Feb’22 amid high expectations. Although the Economic Survey forecasted 9.2% real GDP growth in FY22, followed by 8-8.5% growth in FY23, the markets were anticipating that the government would announce measures to support weak consumption. Instead, the government continued on its course to improve the quality of its expenditure by focusing on investment growth.
Budget has been announced amid a positive backdrop of a sharp economic recovery from the pandemic lows as well as a buoyant capital market. The backdrop, however, has turned more challenging in the recent past with the US Fed and other Central Banks shifting their focuses towards containing inflation. Consequently, the prevailing easy liquidity along with the low interest regime is on the last lap now and equity markets have, naturally, turned topsy-turvy.
However, the budget presented by the Honourable Finance Minister (FM) has demonstrated continuity as it has built on the last year’s budget announcements. Growth revival remained the principal theme of the budget. With this objective in mind, the government has largely continued with its focus of:
a) driving capital expenditure (capex) by enhancing gross budgetary supports for roadways, railways and defence sectors, and
b) propelling the manufacturing sector through PLI schemes, while transitioning the economy with an emphasis on urban planning, logistics, EV’s, solar module manufacturing, river linking, water connections, etc.
The FM has also focused on using PM Gati Shakti that was announced in Oct’21 to dismantle silos within the government for seamless building of infrastructure projects and improving the ease of doing business. Resisting the temptation of populist giveaways ahead of the five state elections in Feb-Mar’22, the government has largely remained on track with a focus on long term structural growth drivers. Fiscal deficit is expected to moderate to 6.4% in FY23 BE from 6.9% in FY22 RE.
Overall from an equity market perspective, we believe the budget, on balance, has no unpleasant surprises, while there remains some room for further capex/spending push as the government is likely to overshoot its revenue targets. While there could be some disappointments on the absence of measures to improve consumption, economic recovery in FY23 coupled with vaccination progress would continue to drive demand recovery ahead.
Crude prices around USD90/bbl will present a challenge for inflation ahead and act as a risk for fiscal maths. Given the continuity of policy focus and pronouncements, we believe markets will discount the budget and shift focus to:
a) rising interest rate regime globally and consequent higher bond yields and
b) corporate earnings growth that has remained resilient so far in the ongoing 3QFY22 earnings season.
The forthcoming RBI policy meet on 9th Feb’22 assume greater significance now with respect to the future of liquidity and interest rates. Valuations are slightly rich with Nifty trading at 20x FY23E EPS and thus the corporate earnings delivery becomes highly crucial, more so in a rising rate regime.
Mkt Outlook Feb 2022:
- Nifty is still trading 1000 pts lower from its all-time peak.
- Q3 results are till now matching expectations and crucial for market which are trading on high valuations.
- RBI Policy on 9th March. Central Bank will declare path on increasing rates due to persistent inflation and overall economic recovery. Negative for market.
- LIC IPO will hit the market by Feb-end with a staggering issue size of 75,000 Cr, the largest till date. Market may correct as it will suck huge liquidity from the system.
- Crucial state election results (mainly UP) on March 10th. If BJP does not win or wins with small majority, it will be negative for the market.
Hence be prepared for a volatile month. Nifty may test 16400 its support level in case of any above negative news. But good corporate results will keep downside capped and should be used as a buying opportunity.
Since investments in international funds have been stopped temporarily due to overall industry limit of $7 Billion set by SEBI has been reached. SEBI is soon going to raise this limit, till that time no new investments will be allowed in these schemes. Nothing to worry as this is normal checks & balances from SEBI. Hence allocation in international segment will be nil for this month.