The big quandary facing this author, writing an article which will be published two days after the budget announcement was this: Why will anyone read an article on the budget when in all likelihood, market participants have moved on to analysing the impact of President Trump’s tariff announcements.
At a fundamental level, the very fact that we are having this thought is an indicator of how to view markets as we move into the second month of 2025. We believe the destiny of markets will be determined by global newsflow (read Trump 2.0 driving PE ratio) and rubber will hit the road as far as corporate earnings (EPS) are concerned.
Let’s put this into context of the budget. Enough and more research and articles have been written on the implications of the budget. At the headline level, on the capex side, for FY26, the estimate is more or less the same as that budgeted in FY25 (but missed by 8%). And on the consumption side, the tax cuts are being relied upon for driving growth.
Our clients (investors) are asking a few fundamental questions.
1) Does this mean a big drive to consumption and hence should one now jump into consumer stocks?
The HDFC Securities Institutional Research team thinks that the budget is positive for consumer discretionary and staples, Automobiles, Real estate, Agriculture. So at the base level, it may seem like this is the place to be. The multiplier of a consumption stimulus is usually just over a factor of 1.0. Even if one assumes a 2-3% growth delta, one would still be entering stocks with valuations in excess of 40-50 times (or more). Usually this is not a great starting point for generating stock returns in excess of earnings growth.
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2) Why didn’t the government increase the capex number higher?
Some commentators seem to think that it may be driven by internal bottom up exercises, which indicated some systemic capacity constraints. So while capital goods, infra and industrials companies would benefit, this level of growth has already been priced in into the stocks.
3) Is the fiscal prudence now a sign of austerity? If so, then why would the government go with this in an environment of uncertain economic growth?
We feel this is in fact linked with the first point made in this article. In an environment of changing geopolitics (tariffs and alignments), the government has decided to hunker down and ensure that macroeconomic stability is paramount. A 40-bp reduction in fiscal deficit target for FY26 may seem like austerity but is a step in that direction. And it creates space for adjusting to new emerging realities (‘unknown-unknowns’). This will avoid any problems in the bond, equity and (most importantly) the currency markets and hence a repeat of the taper tantrum of 2013.
4) Where is the scope for positive surprise?
At this time our Research team forecasts a 11-12% earnings growth (not including Oil & Gas) forecast for the market in FY26. In the context of the budget forecast of 10.1% nominal GDP growth, this seems realistic. This growth itself is primarily driven by the ongoing rural consumption recovery and capex. On these numbers, reality seems priced in.
Key drivers of upside (or downside) would be monsoon (rural), disinvestment (creating fiscal space), no tariff shocks (wait and watch!), private sector capex and inflation prints. Upside risk is limited on all of these. Regarding inflation the risk of another spike due to global or agri factors could in fact lead to real GDP prints of sub 6.0%. It will be interesting to watch how GDP in the 5 handle impacts market sentiment.
5) So, how does one play markets. All analysts (including yours truly) have been advising a shift to large caps but that trade has not really worked. So what now?
We feel that the relentless selling from FPIs is a risk off trade moving money back to the safety of the US markets. However, relative safety in the large caps (especially consumer and banks) is still preferred and one should persist. Other than this, we expect to see active (albeit slightly muted) participation from the domestic investors. In this context, bottom up stock picking remains the key to find GARP (growth and reasonable price).
Investors would be wise to moderate return expectations to be in line with earnings growth (or slightly lower), stagger their investments as we move towards the June – September quarter and the market starts looking at FY27. Meanwhile, volatility should be used to add positions in companies delivering earnings growth in financials, consumer discretionary, healthcare and large cap IT, Industrials, real estate and allied sectors.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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