At lower levels, one should go contrarian and accumulate stocks for long term earnings growth potential
Financial market reaction to the budget has been mixed while bond and currency market has shown enthusiasm, the share market has turned nervous. Participants who were expecting measures that would propel the earnings growth of listed companies in a hurry are surely disappointed. The rise in the tax rate for ultra HNI has not gone well as they are also the key market participants.
Also, some impact on valuation multiple is feared as promoters stake has to come down gradually. But we need to understand that the era of ‘budget investing’ is over and should not extrapolate the immediate budget impact to derive long term market direction. Possible sell-off is not due to any de-rating in earnings or earning quality but due to multiple stabilisations. At lower levels, one should go contrarian and accumulate stocks for long term earnings growth potential.
This first budget of Modi 2.0 is a statement of bold policies in terms of the economic direction that it seeks and has shown enough flexibility that gives confidence that it will realise the goal it has set. Post multiple 'system clean-up exercise' during Modi 1.0, the economy is facing demand slowdown and extreme liquidity crisis. Businesses are facing historic tough times owing to working capital constraints in the trade and industry. In certain sections of the economy, even demand slowdown is linked to this liquidity crisis.
The finance minister has rightly prioritised the liquidity issues and has taken strong innovative steps. Maintaining fiscal discipline, large PSU Bank recap, focus on higher foreign investments, lessening the burden on the domestic bond market and tackling NBFC mess are important steps. This liquidity crisis has evolved over last 18 months and the benefit of the steps taken will also take 6-7 months before showing results but the colossal damage that the crisis is putting on the economy needs these strong actions.
This budget also signals very strongly that the government would not be influencing capital decisions of Indian businessman by super focusing on selective pockets and will allow the natural demand flow of the economy to be the guide. Nonlinear policies on divestment and attracting overseas capital for the sovereign, REIT and InvIT and also attracting equity foreign capital by improving the free float market cap are strong long term positives.
Factor reforms have been talked in the budget and actions on those counts would be eagerly awaited. But if a nation’s economy were a human body, money flow or liquidity is like the blood flow. And what government has ensured that this blood flow remains sufficient till different organs start normal functioning.
For investment decisions, one clear direction from the budget is that long duration fixed income papers and mutual funds would give decent return going forward. Contained fiscal deficit and other measures will encourage RBI to go for higher cuts in the interest rate. Post short term trading setback, equity would be largely tracking the earnings growth trajectory.
The author is the Chief Investment Officer at Nanrolia Financial Advisors Ltd.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.