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budget impact on stock market: Should you rejig your portfolio after capex push in Budget?​

The Budget is growth-inducing and does the heavy lifting by sharply increasing capital expenditure. The focus on boosting manufacturing as well as an underlined emphasis on areas such as startups, modern mobility and clean energy shows the FM has prioritized long-term growth. Therefore, one will have to change and realign portfolios from consumption-oriented sectors to industrial, capex, infrastructure, PSU and financials.

A higher outlay under the PM Avas Yojana will be beneficial to real estate and related ancillary industries. Data center classification as infrastructure should lead to greater investments in this pocket. Green bonds will be of great help for PSUs in the shift to sustainability. We see the possibility of serious capital coming to India through this route.

With the privatization of Air India and the announcement of LIC IPO, there is a clear message from the government that they will now play the role of a facilitator. As a relief, despite being ahead of state elections, the Budget did not have any big populist measures, which some investors were nervous about. Encouragingly, like last year, Budget estimates are realistic, believable and transparent. This will make international investors look at India with a different lens as compared to China.

As the big event is over, the stock market will shift its focus on Q3FY22 earnings and global cues. The earnings season so far has been quite robust and the corporate commentaries are indicating that while there are supply-side constraints, the demand environment is quite encouraging. We see companies continuing to be able to raise capital from IPOs with more realistic valuations. After a period of almost 7 years wherein the Nifty earnings have grown in single digits, we have entered a phase of strong earnings momentum since FY2021, led by robust economic recovery, low interest rates, massive pandemic-induced cost restructuring by corporate India and a high degree of operating leverage.

The Indian market, after witnessing a Teflon rally since April 2020, have turned volatile since November 2021, as the high inflation rate in the US led to both acceleration in the tapering program as well as the expectation of a rate hike in the US as early as March 2022. The rise in global bond yields (on the back of rate hike expectations) has led to significant pullback in the high growth (esp. technology) stocks globally and the Indian markets have followed global cues. We believe India is a buy on dips market.

In the near term, the two factors – global liquidity and sentiment – are negative, and will affect the short-term equity market performance. Now with the big local event, the Union Budget, over, the focus will shift back to the quarterly earnings that have been very robust, and we believe that Nifty is on track to deliver 30%+ earnings growth for FY22.

Apart from global cues, market participants will also closely watch election result in the key state of Uttar Pradesh, which is going to polls in February. To conclude, it is very difficult to predict short-term factors like liquidity, sentiments or election results, but the Indian earnings flywheel is definitely set in motion and we expect 22%+ EPS CAGR over FY21-24E, and the Union Budget has only strengthened our conviction given the focus on revival of capex cycle.

We maintain our constructive view on the equity market and India continues to remain a ‘buy the dip’ market rather than a ‘sell the rally’ market. In the near term, we expect largecaps to outperform mid-and-smallcaps. Currently, we largely prefer domestic cyclicals (BFSI, industrials, cement, real estate, etc.) over defensives, and growth over value, although we could be positively biased on select defensives, value and midcaps on a bottom-up basis.

(The author, Ashish Gumashta, is CEO, Julius Baer India. Views are his own)

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