Daily Voice: Budget likely to emphasise govt's dedication to fiscal discipline, says Right Horizons' Anil Rego

While the budget and Trump’s policies are likely to have an impact in near to medium term, we see no materialistic impact over long term. The markets continue to demonstrate strong resilience, with investor participation remaining high. We believe that valuations are notoriously ineffective for predicting short-term returns but are salient at extremes. We have observed that high valuation regimes can persist for extended periods and typically pose no hindrance until they reach excessive levels.

We believe domestic equities command premium valuations relative to major peers supported by healthy corporate earnings, ROE’s & decadal low FII holdings. From a valuation perspective, we see fair valuations in largecaps, stretched valuations in the broader market and reasonable valuations in selective quality SMID’s (small-midcap) trading at discounts considering their growth potential. Earnings for Q3 FY25 are expected to show growth supported by tailwinds. The festive season, higher government spending, recovering consumer demand, and the wedding season all contribute to an optimistic outlook for the quarter.

Will the Indian equity market give better returns than the US markets in 2025?

India’s economic outlook for 2025 blends optimism with uncertainty. The outlook for the year ahead is shaped by a dynamic blend of factors, including evolving monetary policies, shifting geopolitical tensions, and structural transformations. While macroeconomic fundamentals are expected to strengthen, the journey ahead requires adapting to an unconventional and unpredictable global landscape.

We believe domestic equities command premium valuations relative to major peers supported by healthy corporate earnings, ROE’s & decadal low FII holdings. Amidst earnings moderation expectations, INR depreciation there are positive developments – commodities are expected to experience softness, corporate debt-to-GDP has fallen below 25%, and banks are well-capitalized. Capital markets remain robust, and there is ongoing reform momentum, particularly focusing on boosting the manufacturing sector. We expect domestic equities to register moderate returns for 2025 likely.

What do you make of the recent provisional numbers announced by corporates ahead of the actual Q3 earnings? Also, what should be the focus areas during the earnings season?

We expect consumption companies to deliver good growth on the back of the festive season, recovering consumer demand, the wedding season & manufacturing driven by higher government spending, and execution of a robust order book. At the overall level, growth is anticipated to be better than H1FY25.

Which themes could drive a stronger portfolio in 2025?

Unlike the 2000s, India's bull market in the 2020s is distinct from other emerging markets. This divergence is not driven by a higher GDP growth differential, but rather by an improved earnings differential. The shift from an uptrend in capex cycle to moderation in profits warrants one to be selective and focus on businesses. We focus on themes with unique growth drivers: Hospitals are benefiting from cash flows that significantly exceed regular capex, enabling faster growth.

In the consumption investment landscape, rural recovery remains in its early stages, urban consumption is being impacted by weak incomes and a slowdown in credit growth. Valuations in the sector are also on the higher side. However, the sector is rich with quality franchises and remains a key focus area, especially in the gold segment. We prefer quality companies with healthy unit economics and SSSG (same-store-sales growth) which are anticipated to become consistent compounders.

Do you see economic growth picking up again?

In H1 2024-25, YoY real GDP growth slowed to 6.0%, down from 8.2% in H1FY24. On the macroeconomic front, the economy is projected to remain robust, with GDP growth anticipated at 6.7% in FY26 compared to 6.4% in FY25E, though risks persist due to weak urban demand and sluggish private capital expenditure growth.

Real GDP growth is anticipated to rebound in H2 of the current financial year, driven by a recovery in domestic factors such as increased public consumption and investment, robust service exports, and favourable financial conditions.

Inflation is projected to decline to around 4.1% in FY26, boosting consumer purchasing power from its current subdued levels. The FY26 Union Budget is expected to emphasize capital expenditure; however, fiscal prudence and a high base could limit its growth. Furthermore, the RBI is anticipated to begin its much-awaited interest rate cut cycle in CY25 further aiding growth.

Do you expect any major announcements in the Union Budget that could drive a strong market rally?

In the Pre-Budget talks with trade unions, and energy, infra and urban development sectors, key demands included increasing the minimum EPFO pension five-fold to Rs 5,000 per month, exemption in income tax limit enhanced to 10 lakh annually, scrapping the new pension scheme and unified pension scheme; reinstate the old pension scheme and introduce an additional 2% tax on the super-rich to ensure social security for all informal work.

We do not anticipate significant policy announcements in Budget 2025. Given the prevailing political stability, the budget is likely to emphasize the government's dedication to fiscal discipline, aiming to meet its fiscal deficit targets. We expect sustained investments in infrastructure.

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