Insights

So what are the short-medium term implications of the budget on the markets?

As my colleague Seshadri mentioned, budgets are increasingly less and less about micro-math and more about policy thinking and signaling. Going by that, there is no immediate stimulus in the budget as all NDA governments have largely eschewed sacrificing fiscal prudence to pump prime growth. The government is largely going to rely on the RBI and the monetary policy to do the heavy lifting. With benign global interest rates and if oil prices behave, there is room for further easing. Keeping fiscal discipline is very important if we want to bite the proverbial apple of foreign debt capital to supplement limited domestically fiscal headroom to drive economic growth.

By recapitalizing PSU Banks and putting some sort of a floor on the NBFC crisis, we hope the transmission of lower rates and better liquidity start reaching the economy at large. However, this is a process and it may take a few months before we see lead indicators of growth turning. We still have to live with continuous deleveraging of the corporate sector. But the seeds of a long desired recovery may well have been sown. So it is fair to expect a long slow recovery. Earnings growth may still be tepid for two quarters at least.

The NIFTY/SENSEX rally was largely led by large caps in the last 12-16 months. That may take a breather and the markets could correct and go into a consolidation phase over the next few months. This may happen due to:

1. There is perceived supply of new paper due to the reduction in promoter holdings from 75% to 65%, though there may be a period prescribed for an orderly reduction,
2. Rupee appreciation due to expected inflows from foreign debt borrowing coupled with tax on buybacks could keep the large IT sector under check
3. No immediate fiscal push for growth and tepid monsoons
4. Potential slowdown in global growth signaled by negative interest rates

The huge premium of the small-mid caps to large caps has now turned in to a discount, finally!!! But that discount may stay for a while before the larger cap market consolidation phase gets over. But it has certainly now given us a bigger universe of opportunities to look from. Investors may have to wait longer before strong returns come back but the opportunities will come beckoning in difficult markets as they always do. But we will need both discipline and patience and faith in the ultimate ability of the economy to turnaround and consequently markets to reward us, as they always do.

Hiren Ved
Chief Investment officer
Alchemy Capital Management Pvt. Ltd