The government has definitely not ignored its vote banks in the budget. We were expecting some populism and in many ways it was a populist budget, but what stood out was the superior balancing act. Unlike earlier budgets, this time the market had subdued expectations from this budget and most of the factors mentioned were already priced in. It was an “ABCD” Budget – Auto,banks, consumption and developers. There has been a huge push on consumption and the real estate sector got a much needed relief. The middle class got a tax break and farmers got an income support scheme. The icing on the cake is that the government has managed to pull of all off this without any compromise on fiscal consolidation. The 3.4% Fiscal deficit target sounds optimistic but a lot will depend on the government’s disinvestment target of Rs90Bn and its revenue management thru GST tax collections – which many may argue was a tad overoptimistic. To sum it up, it’s a good balancing act and a positive for the market the government has managed to deliver to its vote banks without compromising on fiscal prudence. Markets will now move on and set its eyes on the RBI for some policy easing.
10BN-12BN $ Consumption boost – a key for tactical portfolio allocation!
One of the biggest elements to the budget was the boost for consumption growth that would arise from the increased stimulus to the rural economy and middle class. 120 million farmers are set to get Rs6, 000 per year in three equal installments effective from December 2018. The middle class Indian got a tax rebate up to the tune of Rs5 Lakh. In effect both these moves will amount to Rs180bn worth of funds and it will directly accrue to the hands of the middle class. Lesser taxes mean higher disposable income in the hands of people, which is a key lever for consumption growth. From a tactical positioning perspective, we think the time is ripe to increase allocation towards FMCG stocks, consumer staples, retail plays, paints, consumer discretionary plays and those stocks that have a higher exposure to rural demand.
Low ticket consumption items will benefit more!
The quantum of support and reduction in income tax rates are more beneficial to the middle income (aspirers) and lower income category of the economy. So intuitively, the lower ticket consumption items would be the ones that would benefit first. According to an NSSO study, for the bottom 60 percentile of rural households in India – 59% of consumption is allocated to food, 10% on fuel and 7% on clothing. The below data indicates the allocation of spending by households on previous occasions of budgetary stimulus and it shows that basic items like food and other durables were the biggest gainers.
Source: NSSO, Credit Suisse Research
Uncertainty Discount will certainly reduce for the incumbent government
Markets love continuity and stability and market moves is a play on perception. In the markets, there was some uncertainty surrounding the current Modi governments’ ability to regain power in 2019.The dismal loss in the recent state elections only accentuated those concerns and the market started discounting all of the uncertainty. This effect is more pronounced on FII flows – foreign investors like to see consistency of policy reforms and stability in government. With the current budget, the incumbents have hit the nail on the right spot and this will win back a lot of the frustrated voters that might have been lost in the previous state elections. In my opinion, this should also help in reducing the uncertainty discount that was playing on market valuations and will bea sentimental positive for the market in the near term.
Focus should remain on earnings growth
We would again reiterate what we have been emphasizing in the past. The market will reward those companies that show a semblance of earnings growth in the current season. We have already started witnessing quite a few surprising on the earnings front in the current quarter and that earnings surprise is what will help move the market. So our focus will remain on those stocks that are showing strong earnings in the current quarter and will surprise the markets in the coming quarters.
To conclude, we will continue to focus on earnings sustainability and will tactically position all our Plus Delta PMS clients’ portfolios to take advantage of the near term levers that will unfold in the market owing to the governments budgetary stimulus.
Fund Manager – Plus Delta Portfolios
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