Niraj Kumar, Chief Investment Officer at Future Generali Life Insurance India, says the Budget is expected to be pragmatic and strike a fine balance between the need to spend on populist heads, especially agriculture and rural development, and continue being investment-oriented with thrust on growth revival via capex and infrastructure spend.
Kumar has been an investment leader over last two decades.
"We don't expect Budget 2022 to throw any curveballs that may impair the momentum of markets and the economy," says Kumar. However, "in case the government embarks on a tighter fiscal policy and surprises the Street with a lower than factored fiscal deficit, then it may buoy bond markets."
Could the Budget focus more on populist measures, especially ahead of States Elections, or would it be a growth-focused budget?
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With Budget 2021 being hallmarked as a historic and pro-growth Budget, the stage is now set for a good follow-up in 2022. Budget 2022 beckons for a dexterous balancing act to achieve and that should do all that it takes for a sustained 8 percent growth path in the post-pandemic era while ensuring fiscal prudence. With the Monetary policy embarking on the tightening path, the baton obviously lies on the fiscal policy i.e., the government. However, fiscal prudence would be the chosen path over fiscal profligacy, given that Budget 2022 will be presented in the backdrop of tighter global monetary policy, rising inflation & higher yields.
While the government is posed with the difficult task of fiscal consolidation amid an uneven growth outlook, rising inflation and rising CAD (current account deficit), it is likely that it will consolidate in a gradual manner amidst a credible medium-term framework. Besides, the fact that government will have some fiscal space this year as COVID abates, will provide headroom to the government to focus on pro-growth measures.
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We reckon the budget to be pragmatic and strike a fine balance between the need to spend on populist heads, especially agriculture and rural development, and continue being investment-oriented with thrust on growth revival via capex and infrastructure spend. There may also be merit in supporting consumption demand for those at the bottom of the pyramid consumers. Fiscal measures targeted at supporting demand would bode well for pick up in private capex and given that balance sheets of large corporates and banks are fortified, any sustained revival in demand can lead to a virtuous growth cycle. Budget 2022 should also present a concrete roadmap for achieving Budget targets.
Budget 2021 had several path-breaking announcements. While we clearly understand the difficulties of last year amidst several COVID-induced disruptions, the progress on almost all these announcements has been lacklustre & patchy. Even CAPEX which was the cornerstone of the last budget has been trailing behind the target. While the capital market environment has been buoyant, the process of divestment and privatization has been slower than expected. We would like to see more concerted efforts on the execution of already announced initiatives and concrete measures to drive execution in the future.
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Will the government focus more on sectors that generate more employment or sectors that are affected the most by the pandemic?
We can expect the government to strike a reasonable balance between the focus on employment generation and providing a healing mechanism for the impacted sectors. The focus will be on long-term growth propellers such as continuing focus on infrastructure, PLI (production-linked incentive) scheme for manufacturing, and national monetization pipeline along with the renewed push for privatization/disinvestment.
Budget 2022 should present some progressive reforms directed towards Agriculture and Manufacturing sectors, enabling them to achieve their true potential. Budget 2022 should at the same time focus on providing the funding for the reeling informal sector, MSME’s and contact heavy intensive services sectors viz. travel and hospitality, which has been impacted by the pandemic. It is likely that the government would steer clear from dole-outs and focus more on credit guarantees and institutional support, as has been the response in the last two years of the pandemic.
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What could be a surprising element in the Budget, if any?
Prima facie, we don't expect Budget 2022 to throw any curveballs that may impair the momentum of markets and the economy. However, in case the government embarks on a tighter fiscal policy and surprises the street with a lower than factored fiscal deficit, then it may buoy bond markets given the lower borrowing, while the equity markets may clamor around growth concerns.
If the government fails to touch upon the key chords of growth in terms of targeted redressal of the reeling sectors along with capex directed towards infrastructure and divestment targets, then we may see some negative reaction. Nonetheless, if Budget 2022 presents a pragmatic roadmap for disinvestment and monetization of assets with explicit quantum and timelines in place, it may positively surprise the markets. Lastly, any significant spike in taxes/ cesses may be perceived negatively by the markets, as the market is currently not factoring in any major tax changes at the fore.
What could be the factors that can drive the market rally on the budget day or persuade FPIs to pump in money on the budget day?
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The impact of the budget on the market has been on a secular decline, however, market participants still need to navigate volatility. However, the market would laud a Pro-growth budget with funds channelized towards targeted capex, and any big infrastructure and real estate push will be perceived positively and could support a rally and direct FPI buying in select large caps and sector leaders.
Key factors that will impact the market momentum on the budget day would be credible fiscal deficit target, the government's spending plans vs. fiscal consolidation, changes to long-term capital gains tax, changes to tax rates, push for “Make in India’ and timing & quantum of asset sales along with targeted consumption related incentives. Overall, a growth supportive budget with the focal point being the requisite growth push reforms while ensuring fiscal prudence will augur well for FPI flows to India.
How do you read corporate earnings announced so far, for the December 2021 quarter?
we embark into the December 2021 earnings season, against the backdrop of the strong earnings trajectory witnessed in the last few quarters, we reckon this time around we may see significantly divergent trends across sectors. So far, results have been dominated by large IT companies, where the narrative remains strong as demand remains robust. Besides, the initial business updates by the financials have posted a strong show on growth and improvement in collection efficiency. Also, Metals & Mining would benefit from elevated commodity prices. On the contrary, commodity users such as Automobiles, White Goods & FMCG would witness slower growth & margin headwinds. Nonetheless, we believe one should see beyond the prism of the incumbent earnings season and look at the long-term prospects of India’s earnings growth which looks decidedly promising.
After Budget, what are the other important events or factors to watch out for in the rest of 2022?
The most important event will be whether we are indeed progressing from pandemic to endemic, which will have a directional impact on the economy and markets. We reckon earnings performance will reflect the equity markets performance in the near term. Markets have indeed priced in strong earnings growth over FY22 & FY23. Delivery of earnings is critical for markets to sustain the current elevated levels of valuations. Beyond Earnings & Budget, there are a few events on the horizon that can create triggers to cause volatility in the markets.
Participants’ mind space will be occupied by how quickly monetary policy normalizes in the US and how quickly the supply-side disruptions abate. We will also be watching out how Geo-Political events like the tussle between US & Russia over Ukraine or between China & Australia evolves. Domestically, state elections, RBI’s MPC Meeting, LIC IPO, and Monsoon are other important events to watch out for.
Do you expect the market to give a double-digit return in 2022 and close the year above 21,000 on the Nifty50? Also in 2022, do you think the market will still be worried about the expected rate hikes by Fed, inflation, and Covid.?
After a stupendous rally in markets the last two pandemic years, we believe that the phase of easy money might be over in markets and CY22 is expected to be a stock pickers market. Given the elevated valuations, the biggest concern for markets would be earnings growth and not COVID or interest rate hikes. We expect market returns would closely track earnings growth. Markets over the last 18 months have been quite charitable and stocks across the board have rallied irrespective of the stock fundamentals. 2022 could be different in that regard and any disappointment in earnings may follow with a sharp negative reaction. While we continue to expect strong earnings growth in FY23 (High teens), the trends are going to be divergent across sectors and hence one needs to be careful about sector/stock selection.
Risks emanating from Three Rate Hikes by Fed, Inflation, and Covid are the known wall of worries which the markets have already climbed or are in the process of climbing. In fact, when it comes to risks such as US FED Rate hikes happening faster than is being projected in the DOT plot, one has to be cognizant of the fact that rates would be rising from abysmally low levels, and despite the rate increases, we shall still sail in a relatively low-interest-rate environment in the medium term. Thus overall, we don’t see these factors posing a great risk to the markets in 2022, but surely it will add to volatility as markets and valuation need to find a new equilibrium in the context of shrinking liquidity.
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