Q: The market rallied nearly 9 percent from its recent bottom. Can we call it a Pre-budget or pre-earnings rally? Or is it because of attractive valuations? Given the current run-up, can the market hit fresh record highs before Union Budget?
There are several reasons for the recent rally, in my opinion. In the last weeks of 2021 was a “Santa Claus rally” where FII selling pressure eased off due to the holidays, but in the first week of 2022, the rally has been because of the now attractive valuations and easing of Omicron impact worries. Banking and Financials are shining in this rally. These sectors hint at a Pre-budget rally as the Union budget usually comes with many Banking reforms. In addition, the earnings season will be interesting, which might also be a positive stimulus.
The correction we saw in the last quarter of 2021 was explained as an impact of Fed taper worries, overheating valuations, Omicron impact, etc. At the present moment, all these worries are priced in, and India’s economic conditions are healthy and improving with more positive cues to come. Therefore, I would not be surprised at the rally continuing, and if the Budget delivers on growth, the market can achieve new highs.
Q: Union Budget will be presented on February 1. What are your top five expectations from the budget, or is it a non-event for the market?
Union Budget is the primary tool for growth and is being looked at with many expectations this year. It would be a significant event without a doubt. My top 5 expectations from the budget would be:
Support for growth by not limiting the fiscal deficit targets for next year
Support for the rural & MSME economy as the rural demand is shrinking and it might even impact some earnings
Infrastructure push. The infrastructure sector is in the nascent stage of a cyclical recovery and requires government support.
Aid for hospitality and transport industries which are struggling post-pandemic.
A good number of fiscal performance for FY21 - tax revenues higher, spending and deficit much lower than budgeted figures
Q: What are the sectors that the government will focus on in the Union Budget?
The corporate sector is doing well, with low-interest rates, tax burden, and PLI schemes, but the Rural and MSME sectors are struggling, so the government might focus there. Also, this being an election year of UP and Punjab, the government might incentivize the agriculture sector. The Finance Minister has hinted at a focus on the Infrastructure sector. Banking reforms always get a slot in the budget. Aid is also expected for hospitality and transport sectors struggling post-pandemic.
Q. Do you feel the more focus will be on asset monetization and divestment in the forthcoming budget?
The government has decided that it is not in business and wants to divest significant public assets apart from those in some key areas. But unfortunately for the government, the divestment targets have been missed by a long shot. Although LIC IPO is still expected to come in this fiscal, significant other divestments like BPCL, IDBI, and Banking will be pushed to the following year.
For the divestment to go through successfully, reforms are needed in the legal framework, but these reforms might not come in the current budget. Irrespective of that, I expect a continuing focus on divestments.
Q: Companies will start releasing quarterly numbers next week. What are your general expectations from the December quarter earnings, and will it support current market valuations?
The December quarter earnings are expected to be firm, with strong economic growth and demand were seen in the festive season. The IT sector is expected to continue posting solid numbers. The Banking sector could also show good numbers that would be welcome and Industrials, Realty & Cement are expected to post a good quarter. On the other hand, FMCG would struggle due to low rural demand, as the advance earning estimates suggest. Even with the growing topline, the margins could be under pressure due to inflation and supply shortages.
Overall the earnings are expected to keep up the pace and be robust, which would ease the valuation worries that the Indian market is witnessing.
Q: Do you think virus is not a big risk henceforth considering the rally in the US? Also do you expect three rate hikes by US Fed in 2022?
There is an increasing reinforcement that the Omnicron variant is less severe and would not disrupt the economy as much as the delta wave. As a result, the UK has decided not to enforce a lockdown this time. So the low impact of the virus is a positive development, but it is tough to comment on the future course of the virus.
US Fed is taking inflation very seriously. The recent Fed minutes flag the chance of an earlier or faster interest rate hike, but with the Covid variants still popping up, it is tough to say if the Fed would be successful in its plans. What is good is that the Indian markets are pricing in the hikes, and the Indian economy this FY is posting solid numbers, so the hike’s impact might not be as bad as it has been previously.
