Indian Equity markets touched an all-time high at the beginning of June. The markets then took a breather, as all eyes were on the Union Budget for FY19-20. The budget announced on July 5th ticks the right boxes as it focuses on policy continuity and sustainable growth while not compromising on fiscal consolidation and macro stability.
The policy direction seems to be progressive, directed towards elevating the Indian economy from current USD 2.7 trillion to USD 5 trillion by 2024-25. The emphasis is on investment-led and inclusive growth. Some of the key measures presented by the Finance Minister were to shore up tax and non-tax revenues, provide liquidity support to the Banking & Financial sector, boost the Housing sector, and open up the capital account for foreign investors.
We have been seeing a gradual slowdown in consumption over the past few quarters and tight financial liquidity has been one of the key factors which dragged down growth. To address this issue, the government has extended a 6-month window of one time guarantee for first loss up to 10% for purchase of high rated pooled assets of financially sound NBFCs to INR 1 lakh Cr. The RBI has also infused additional liquidity of around INR 1.5 lakh Cr. Cumulatively, both measures should provide liquidity to the tune of 10% of outstanding assets of NBFCs and HFCs and more importantly bring down the cost of funds.
The government also announced INR 70,000 Cr towards recapitalization of PSU banks, which was higher than market expectations. This is over and above INR 1.65 lakh Cr capital infusion by government in PSU banks in the last 2 years. This much needed capital will help the public sector banks to provide for bad assets (which are declining) and also provide growth capital.
The housing sector is a major contributor to GDP growth. The government announced additional INR 1.5 lakh.
(total INR 3.5 lakh) of tax deduction on interest expense for houses costing less than INR 45 lakh for first- time home buyers. In Phase 2 of the Affordable Housing scheme (PMAY-G), the government is planning 1.95 Cr houses to be built with amenities like toilets, electricity, and LPG connections. This should give a boost to the real estate, housing finance, building materials, and consumer discretionary sectors.
The government has announced a slew of measures to attract foreign investors. FDI limits for sectors such as Insurance, Media, and Aviation will be eased. FPIs will be allowed to invest in listed debt securities issued by REITs and InvITs. The government has proposed to align FPI cap to sectoral limits, which is higher than the former limit. It has also proposed to increase minimum shareholding in listed companies to 35% from 25% - we await clarity from the regulator and the timelines for potential implementation. Both the initiatives will result in increase/addition of stocks to MSCI and other indices and on overall basis increase India’s weight in these benchmarks. This will lead to higher FPI flows in Indian equity market. However, the increase in minimum shareholding will lead to higher equity supply in the secondary markets, which can exert pressure on the stock prices of certain companies (where the promoter holding is more than 65%, some of them being MNCs).
India’s sovereign external debt to GDP is among the lowest globally at less than 5%. The government is also looking to raise a part of its gross borrowing program in external markets in foreign currencies. This will result in lower domestic borrowing and will drive bond yields lower in India, which will lower rates and lead to transmission of lower rates in the economy.
Regarding the overall fiscal math, growth assumptions are well anchored, with nominal GDP forecast to grow by 12%. The forecasted growth in tax revenues are a tad aggressive in our view, while the increase in non-tax revenue seems realistic. To the government’s credit, while the budget has announced measures to address issues facing the economy, it refrained from being socialistic and announcing measures to boost the consumption through short-term measures such as directly putting money in the hands of the consumer. With this backdrop, policy makers continue to attempt fiscal consolidation, with the fiscal deficit targeted at 3.3% of GDP vs. 3.4% earlier and market expectations closer to 3.6%.
On the global front, post the G20 Summit, US President and Chinese President agreed to keep the trade war from escalating with no more tariff hikes, and to restart the bilateral trade negotiations. The US Fed left interest rates on hold and signalled a strong bias to lower rates in the near future. Consequently, global equities have got a boost.
We believe the government’s initiatives will likely take 6-12 months to reflect in growth. Given this, we believe that the market will consolidate and provide opportunities to invest in Indian equities in the near term. India’s structural growth story remains intact and gets reinforced by the progressive reforms initiated by the government. The budget also gives a boost to the bond market which is eventually likely to be positive for the stock market as well.
We remain constructive on Indian equity market outlook from medium to long term and suggest that investors may continue to build their exposure to equities, especially through SIPs.
Select themes that we are participating in are Consumption (i.e. Consumer and Consumer Discretionary), Financials (i.e. Private banks, Corporate Banks and select NBFCs), and Industrials (i.e. Capital Goods, Infrastructure, and Cement).
Thank You and Happy Investing!
RBI: Reserve Bank of India; Fed: Federal Reserve; USD: US Dollar; FDI: Foreign Direct Investment; FPI: Foreign Portfolio Investors; MSCI: Morgan Stanley Capital International; NBFC: Non- Banking Finance Company; HFC: Housing Finance Company; REIT: Real Estate Investment Trust; InvIT: Infrastructure Investment Trust
(Source: ABSLAMC Research, Bloomberg)
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.