Daily Voice: Unmesh Sharma of HDFC Securities expects government to stay on fiscal consolidation path in Union Budget

We believe India remains an attractive market and will continue to attract structural FPI/ FDI flows. The core building blocks remain in place- geopolitics (leading to China + 1 and friend-shoring), strong macro fundamentals and strong balance sheets at the sovereign, financial sector and corporate levels. In the near term, we may continue to see moderate to negative FPI flows due to relative valuations. Despite near-term volatility around elections, the market is still recovered to scale the all-time high. Valuation comfort is missing- the Indian market remains expensive at 2 standard deviations over long-term mean (at over 20x PE).

What is the next trigger for the market?

Elections are out of the way and the formation of the coalition government and cabinet are complete. Therefore, a large event risk is now behind us. Post this, the focus will shift towards the post election budget announcement in July. We believe that will assuage the nerves of investors that the fundamentals of the macro remain intact. We expect the government to stay on the path of fiscal consolidation. There are concerns about populism (read: consumption support) due to the election verdict but with the fiscal room generated by the RBI dividend and buoyant tax collections, this is unlikely to impact the pace of consolidation.

The core themes of the government's push for capex and infrastructure will remain at the forefront. Once the July budget is out of the way, we expect a return to normalcy. Volatility has reduced. Expect the focus to shift back towards company-level fundamentals with the Q1FY25 (April to June quarter) earnings season, geopolitical developments, especially in the Middle-East, monsoon trends and evolving political scenarios including state elections. Markets will keep a close eye on the structure of government and alliance partners as we approach state elections starting November 2024.

As discussed earlier, FPIs are likely to continue to take relative-value-based calls. We will keep a close eye on trends in domestic liquidity. FPIs can take relative valuation calls as they have options outside India or even EM Equities. Meanwhile, domestic liquidity is (mostly) trapped within India’s borders. At this time, we expect the structural theme of participation in equities to continue. This has led to thematic (concept) based investing without much regard for valuations. We believe this would support mid-caps till the theme continues.

Do you see a 10 percent correction post-Union Budget as the market looks expensive?

Within a 6-12 months view, a 10 percent gradual correction in the index cannot be ruled out. But our base case remains a sideways movement for 6-12 months as earnings delivery catches up and we roll forward to valuing the index on an FY26 and FY27 basis.

Do you more focus on EV and green energy segments in Modi 3.0?

The government has been focusing on these themes due to global commitments and realities ‘on-the-ground’. We believe this focus will continue irrespective of the structure of cabinet or ministerial positions, and see no impact on the trajectory of these themes in the near or long term.

Should one avoid railway and defence stocks now?

These themes have been key focus areas for the government especially during the most recent tenure. As mentioned earlier, we believe this focus will continue irrespective of the details of government formation. We do not have any stock specific picks as we do not cover any names in these spaces. However, we do acknowledge that many themes linked with this government have run ahead of themselves. Investors should continue to view these sectors favourably but only in context of valuations and delivery of earnings.

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