Brokerages say Budget 2022 good for growth, bad for equity valuations

Brokerage firms termed the Union Budget for 2022-23 presented by Finance Minister Nirmala Sitharaman on February 1 as positive for long-term growth of the economy but negative for equity valuations in the near term.

The Budget estimated a 35 percent jump in capital expenditure spending for 2022-23 to Rs. 7.5 lakh crore from the budget estimates of 2021-22 and a 10 percent rise from the revised budget estimates for last year.

“This Budget captures the transition from a time of pandemic to one that cautiously pulls back support, and then seeks to transition the economy to a stable and potentially higher growth path,” said brokerage firm Edelweiss Securities in a note.

The higher growth thrust solely focused on investments rather than consumption support, however, came at the cost of a slower path to fiscal consolidation.

“The FY23 Budget undertook fiscal consolidation ‘in spirit’ but focused squarely on growth ‘in intent’,” said brokerage firm Nomura Securities India in a note.

Also read: Budget 2022 | Government strikes a fine balance between growth and fiscal consolidation

However, the impact of that slower fiscal consolidation is likely to be felt on the valuations of the equity market, which are still significantly higher than their long-term average.

The government’s fiscal deficit rose to 6.9 percent for the current fiscal, while it is seen at 6.4 percent next year, higher than economists’ estimate of 6 percent.

Government bond yields took note of the higher net market borrowing of more than Rs 11 lakh crore as well as the lack of action on the inclusion of India’s sovereign bond in global bond indices as benchmark 10-year bond yield spiked close to 20 basis points.

“Overall, the feedthrough of fiscal math into bond yields could be negative for equity valuations (which remain expensive),” said brokerage firm UBS Securities India in a note.

Brokerages raised their target for the 10-year benchmark bond yields across the board on fears that the higher supply would push up market rates, especially as the Reserve Bank of India looks to withdraw its liquidity blanket looking to move towards policy normalisation.

UBS Securities now sees the 10-year bond yield at 7.5 percent, which will be negative for valuations of stocks, given that the 10-year bond yield is used as a discount rate to determine the net present value of future cash flows of a company. It’s the same reason why technology stocks have crashed globally after the surge in short-dated and long-dated US bonds earlier this year.

Also read: MC Interview: DBS Bank Senior Economist Radhika Rao On Why Yields Shot Up On Budget Day

From an earnings perspective, brokerages believe that the second-order effects of higher government capital expenditure on consumption in the coming years will be beneficial for earnings growth.

Brokerage firm Morgan Stanley India, which termed that Budget positive for stocks, said, “We are looking at a new capex cycle and, hence, a new profit cycle.”

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