Market Strategy For Budget

The biggest annual event in the form of Budget is staring at us. Often, it is advised to be cautious before a major market event. Yogesh Supekar and Geyatee Deshpande discuss what could be the best market beating strategy with just one month before the major event i.e Budget 2020!



Come February 2020 and everyone including the political class will be focussing on the state of Indian economy and start observing how the Finance Minister tallies the balance sheet of one of the largest and fastest growing economies in the world! It could be a frivolous experience for many bystanders to understand how the revenues and expenditure eventually match, however, for investors, the Budget figures are a serious business and the announcement may actually impact their fortunes.

The upcoming Budget is a major event because many believe that the Indian economy needs serious intervention and policy decisions to boost the economy. All hopes for the economic growth are now pinned on the government decisions. The need of the hour is an expansionary fiscal policy and Budget is one event that will express the strategy adopted by the government to boost the economy. The year 2019 has been an eye-opener for the current government even as it is widely perceived that the measures taken lately will help boost the economic condition of the country. The economic slowdown and the pain in the various sectors have taken everyone including the most optimistic ones by surprise.

With the realisation that the economy is in doldrums and positive intent shown on behalf of the government to solve the murky economic situation, investors are betting on market-friendly announcement in the Budget. The positive expectation this time around persists because the finance minister has been saying that the government will take any measures necessary to achieve the US$ 5 trillion economy target by 2025.

The noise made by the government has given a lot of hope to the investors and the upcoming Budget will communicate the true intention of the current government. After all, the Budgetary decisions and policies will hint if ‘growth’ is the focus or is it simply ‘welfare’ which has been the Budgetary themes so far under the leadership of Honourable Prime Minister, Narendra Modi

Budget expectation:-

Investors want to know whether the current government is serious of the economic growth or the narrative will change this time around from welfare to boosting private investments and providing tax incentives to boost the consumption.

Market participants are sensing that the tax incentives may be doled out to small and medium-enterprises but most importantly, the announcement that can impact the pocket of millions of taxpayers and indeed revive the sentiment of consumers is ‘reducing the income tax slabs.’ There is a speculation in the market that some constructive decision may be taken on long-term capital gains tax (LTCG). Few market participants are expecting that the burden of dividend distribution tax could be shifting from companies to shareholders.

There is a possibility of even increasing the investment limits under Section 80 C and Section 80 D, even as the deduction for interest paid on housing loan under Section 24 could be enhanced.

Tax benefits could be announced for the first time for the middle-class home buyers, where the focus could be on resolving the liquidity crisis that is impacting sectors such as real estate and NBFCs.

Aviation sector will be the point of discussion in the Budget and a 100 per cent FDI announcement is on the cards during the Budget session. Several steps to boost investor sentiment and revive the animal spirits are expected from this Budget.

India’s first Budget was prepared on February 18, 1860 by James W. Mahalanobis.

R K Shanmukham Chetty, the first Finance Minister of independent India presented the Union Budget on November 26, 1947.

Nirmala Sitharaman is the second woman to have presented the Budget on July 5, 2019. 

Market Outlook 2020 

Prasanna Pathak
Head-Equity & Fund Manager, Taurus Mutual Fund. 

What is your outlook on equity markets for 2020?

Markets are setting record highs despite macro-economic and other data points indicating an economic slowdown. This is more to do with global liquidity and flows into emerging markets including India. The market seems to be factoring in a bottoming of earnings and growth, which will only be validated in the next 2-3 quarters. Slew of measures like corporate rate cuts, recap of PSU banks package for housing sector, speedy recovery of NPA and resolution of NCLT cases, further interest rate cuts by RBI etc should help. Divestments of a few PSU's and large dividend from RBI should provide some fiscal space to prop-up the economy. Further measures to boost domestic consumption and benign global conditions/ liquidity would drive inflows in the markets. We expect CY2020 to be a year of consolidation.

Do you expect FPIs to invest more in India in 2020?

Foreign Portfolio Investors (FPIs) have turned net buyers of Indian equities in the last 2-3 months after being net sellers for quite some time. As explained above, it is a combination of global liquidity and domestic factors. Slew of government measures coupled with expectations of bottoming out of earnings and growth, have led to positive sentiments on Indian markets. Earnings recovery, better Fy21 outlook, further measures from the government to boost the economy, may lead to an improved FPI activity in India in 2020.

Which sectors have shown momentum in earnings during FY20?

There have been positive surprises from corporate banking space (private as well as PSU), cement, pharma, retail sectors while metals, auto & auto ancillary were disappointing. Also, the consumption segment, though robust for first half of FY20, is showing signs of fatigue. We believe that the overall earnings are in the process of bottoming out and we expect a further improvement in the earnings in FY21. 

Amit Khurana
HCFA, Head of Equities, Dolat Capital 

What is your outllook on private banks?

We remain positively biased for the private banks for the next year. We expect them to gain market share from the challenges faced by the NBFC lenders and stronger deposit raising capabilities. Some of the private banks have also faced asset quality issues since last year. We believe that most of the issues are behind (lay in the past) now, and fairly well-discounted in the valuations and sentiment. And some of the bigger accounts are on the verge of achieving resolution. These factors will help the private banks to outperform the sector and markets in our view.

What is your outllook on mid-caps and small-caps?

Given the headwinds that a large number of corporates continue to face on the earnings, balance sheet and demand; we are not yet in a position to make a macro call on mid-caps and small-caps. However, we do believe that some of the sectors / stocks have bottomed out. Over the next few months, we will look for signs of consolidation of their businesses and core strengths. It will be the starting point of the next uptrend to us for their earnings and valuations.

Which sectors may surprise positively in 2020?

It’s difficult to call out that at this stage. We feel that the bottoming out is in process – whether that takes one quarter or two will determine our ability to call that out. But we are keeping a watch on the Cement and Real Estate (residential) to look for lead signals of recovery. In our view, they will set the first visibility. We are also closely watching the telecom space where the government supports and price hike by players could significantly impact the earnings positively. It was not very far ago that these players were facing questions on their very existence and now, we are looking at them in a very different light. This could be played out well in the next year.

Which sectors may surprise negatively in 2020?

Not much in particular at this stage. We feel that most of the sectors have bottomed out. If at all, we see only relative risks from sectors / stocks which are of significant premium to markets. Their performance will have to justify such levels, and any disappointments from them could be a negative surprise. The other perspective to this is the consumer demand that has been severely impacted due to the muted income growth. Will that continue to be the case – and if it does, it will imply a sharp deceleration for a lot of related sectors – durables, staples, autos, etc.

Market performance during Budget periods 

A look at the data for Sensex performance for last 11 years, we find that Sensex has on an average managed to close in red on the day of Budget. The average return is negative 0.6 per cent for Sensex on the day of Budget announcement. Running up to Budget or what we call a pre-Budget market performance, we find that on an average, the Sensex has generated negative 1.63 returns in one month prior to Budget. In the last two years, we find Sensex has gained in 2017 and in 2018, one month prior to the Budget day. However, three months prior to Budget and six months prior to Budget, the Sensex has managed to deliver, on an average, 5.26 per cent and 7.46 per cent returns, respectively.

Immediately after the Budget day, in one month, the Sensex has generated 1.26 per cent returns while in three months and six months after the Budget day, Sensex has delivered 3.6 per cent returns and 3.92 per cent returns, respectively. 

Market strategy @ Budget 2020 

As the world economy attempts to move towards sustainability and India follows suit, one can expect government to focus on green energy and electric vehicles. Energy stocks and select automakers may be in demand running up to the Budget announcement day. The housing finance companies and select NBFCs will be in limelight as various sector-related announcements are expected in the Budget even as the government is expected to make announcements related to easing of liquidity crisis in India.

The insurance companies and asset management companies could be the biggest beneficiaries in case the income tax rate slabs are cut and the investments limits are increased using various sections for tax deductions. Expect a positive momentum in these counters with Budget announcement in view.

The government is likely to assume a GDP growth of 6-6.5 per cent for FY21 and the earnings outlook is strong for the coming year. The market recovery could be protracted however, the markets may remain enthused on back of global optimism and tax cut expectations. Financials, healthcare and industrials can be expected to be in limelight, even as the liquidity crisis gets a special attention.

Railways and fertiliser are other sectors that are always in focus around Budget announcement month. Watch out for fertiliser and railway stocks for some momentum. Agriculture stocks will see above average traction as the sector is always in limelight during Budget sessions.

Sensex is up by 15 per cent on YTD basis in 2019 while, the broader markets underperformed with BSE Midcap down by 3 per cent and BSE Small-cap index down by 8 per cent in 2019. Running upto Budget, there is a less likelihood that broader markets will suddenly outperform the major indices. So, it may be a good strategy to stock with winners and create long positions in the sectors that may experience positive announcements in the Budget.

Even though the positive expectations are built up in the Budget this time around, investors and traders should take heed from the fact that the government will have to improve its revenue situation and hence, there will be a limitation in the expansionary fiscal policy. By announcing corporate tax rate cut, the revenue forgone is around `1.45 lakh crore. This will influence the overall revenue collections of the government. It is a well-known fact that the collections from direct taxes and GST have been below estimates. To achieve the overall tax collection target of `16.49 lakh crore is going to be a daunting task.

So play long in the market however, be nimble-footed and book profits as soon as you get an opportunity near the Budget day. 

Vinay Paharia
Chief Investment Officer, Union Asset Management Company Pvt. Ltd. 

How do you see market performing in 2020?

Nifty Index currently trades at a price which is at a small premium to its current fair value based on our internal research. Small and Midcaps have also corrected significantly from their previous peaks and are now trading at reasonable valuations. Hence, we expect the market to deliver modest returns, mainly driven by growth in fair value over the medium-term. According to us, the driver of fair value growth in the medium-term could be a) Government introducing measures for structural economic reforms, b) Cyclical uptick in economy along with improved capacity utilisation, which can result in earnings growth getting a boost from operating leverage, and c) Reduction in cost of equity led by accommodative monetary policies – both locally and globally.

Which sector are you betting on to do well in 2020?

We expect Telecom, Utilities and Financial Services sectors to outperform over the medium-term. The Telecom sector is expected to benefit from recently announced sharp increase in tariffs which has been implemented by the entire industry. We expect this to improve the sector’s health and should hence, reflect in its outperformance. Utilities sector includes companies with regulated businesses, which normally generate fixed returns on capital. We think the sector is deeply undervalued and could be re-rated in the medium-term. The financial services sector is a significant beneficiary of the recently announced corporate tax reduction. Due to an increase in its return on equity, we expect the fair valuation multiple for the sector to rise, which could result in its outperformance.

On the other hand, we expect the Consumer Staples, Consumer Discretionary and Materials sectors to underperform. The current weakness in consumer spending is likely to hit both Consumer Staples and Discretionary sectors, where the valuations are not supportive either. We expect the materials sector to underperform due to an ongoing weakness in the global economic growth and trade wars, which could reflect in softness in end commodity prices. Also, most companies in the sector find it difficult to generate respectable returns on equity on a sustainable basis, which makes us wary of the sector.

What is your outlook on PSU banks for 2020?

PSU banks are essentially corporate lenders, which have experienced significant pain over the past few years due to an impact of credit costs. We think the cycle of rising credit cost is behind us. Besides, most of the banks have undertaken a significant repair of their balance sheets, making them ready for the next growth cycle. The valuations in the space remain attractive and hence, the overall outlook for PSU banks is positive in the medium-term.

What are the key risks facing equity markets in 2020?

 The key risks to markets are
a) Slowing domestic and global economy and
b) Higher fiscal and current account deficit and
c) Rise in interest rates in developed markets.

What sought of returns can investors expect from equity markets in 2020?

We expect Nifty Fair Value to grow at a modest pace over the next five years. We expect the market’s return to track the growth in its fair value. Thus, Investors can expect a modest return from the market, albeit with a higher volatility. 

After 2015-16, for the first time, the upcoming Budget will be presented on a Saturday and the coming Budget will be the first one incorporating the recommendations of the fifteenth Finance commission. 

Conclusion

It is clear that the infra stocks, NBFC stock, Housing Finance Companies (HFCs), financials, PSU banks, Fertiliser stocks and Agriculture stocks may be in focus during the Budget session. Prime Minister Narendra Modi wants India to become a manufacturing and export hub for electronics and it is on his top priority list to make India forex positive. So the export oriented stocks may show some traction as the Budget arrives. 

While there are many reasons to be gung-ho about the Budget day this time around, several rounds of tax cuts and exemptions have made GST revenue deficit instead of being revenue-neutral. Revenue has to come from somewhere and it is the industry which will be taxed. Luxury items could be the target this time and may be taxed at a higher rate.

Stay long on financials and consumer facing stocks along with healthcare stocks for the pre-Budget period and beyond for market beating returns.