A lot has factored in, a short-term stress before Budget 2020

Vinod Nair

In the last one week, as expected, markets entered a phase of consolidation given the fact that a lot was factored in the market about budget expectations and revival in earnings growth led by Q3 results.

But, post-results, it was marginally below expectation, sectors like banks, IT and heavy weights started to correct mildly. We feel that this cautious trend will be maintained in the near-term with a setback that rate cuts are not likely to happen in the short-term due to spike in inflation. On January 17, the pre-budget rally was solid with Nifty50 up by 1.5 percent, Nifty Midcap100 by 6.7 percent and Nifty Smallcap100 at 10.5 percent, on MoM basis, it is fair to expect some consolidation since a lot will depend on the actual outcome of Budget 2020.

Banking sector was expected to show a sea change in its outlook. The results are good but it is also noted that asset quality is still a concern and will take more time to revamp.

Considering today's growth prospects, macro scenario and asset quality, we feel that small finance banks are better placed followed by private banks. On the background of elevated NPA levels, ageing provisions, and ongoing merger activities, it would be wise to be cautious on PSU banks today.

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Private banks, which are grappling under the overhanging effect of bad loans, need to augment more of their capital base and weak retail consumption today. While small banks, with an impressive interest yield, focus on the rural segment, better asset quality and declining interest rate will do better on a long-term basis, the concern is the risk of unrest in the rural market due to political factors.

We had a neutral view on the IT sector, which has maintained after seeing the Q3 results. The results are marginally lower than expected and the muted outlook has remained intact. The sector is expected to see moderation in revenue growth due to weak growth in Banking and Financial Services (BFSI) vertical as a result of lack of client spending, consolidation in European banks and the upcoming election in the US.

Large-cap players will be impacted by higher cost while selected mid-caps can do well due to fading client-specific concerns and attractive valuation.

Globally too, the completion of the US-China deal has provided an opportunity to book profits as the event has ended in-line with the expectation. The second phase or final phase of the deal is expected during March 2020. This will be the focus area for the market and will note the developments of ongoing mutual discussions. As per the phase 1 agreement, the new tariff rates will be on hold till the final Phase 2 agreement. Though Phase 1 has paused a year of tension and uncertainty, yet they are far from solving all their conflicts. Trump’s impeachment trial is underway this week and Democrats are preparing for the first contests of the primary season.

The market is very hopeful of Budget 2020 and expects incentives to be provided to the equity market in terms of restructuring in STT, long-term capital gain tax and distribution tax.

In overall terms, the expectation from this budget is very high with factors like positive measures to industries, cut in tax for the common man and schemes for rural market to boost consumption. Sector-specific goodies are also expected for segments like Auto, Infra, Realty, Aquaculture and Housing.

In terms of fiscal deficit, market is even ready to handle a fiscal deficit in the range of 3.6 percent to 3.8 percent for FY20 against 3.3 percent announced in the last budget. It is also expected that for FY21 fiscal deficit target will be prepared with some ease or flexible, considered the requirement of growth for the economy as the main agenda.

The government is expected to present a realistic assessment of the economy, forecast and measures to place the country on the path to $5 trillion target. A lot will depend on the actual outcome of the  budget, however the market is turning cautious before the big event.

(The author is Head of Research at Geojit Financial Services.)

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