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Post Budget – market to continue higher, new categories winners to emerge

We are done with the budget and the government did its best to juggle matters related to stimulus, infra spending, tax cuts all while trying to contain the fiscal deficit.  Technically the market got most of the things it wanted a focused boost on consumption and a display of commitment to the fiscal discipline that was promised without compromising on the macros.

Our primary business is to read the stock market and the market’s Knee jerk reaction was negative on the budget day although most industry experts were neutral to positive on the budget the markets moved lower, we said we would see a 5% move post budget based on our quantitative analysis which we posted in our last article, and that number has arrived, so now we look forward and present a more structural view of what we expect from the market as a whole going forward.  

3 Very different types of sellers pulled the market lower on budget day

One of the main reasons for the selloff was a buildup in expectations before the budget, most of the measures that came thru were already discounted by the market and was on expected lines – we mentioned many of those in our pre-budget article, and the ones that did not come like LTCG left a sour taste with investors.  The second lot that was unwound was the recent long positions (made without any major expectations of the budget) as some of them showed profits or small losses. The third was disappointed selling from those who were looking for positives in the budget. All combined together in the last hour and the index fell in a heap. Also, we must understand that Saturday was an unusual day with limited institutional participation and many arbitrageurs did not operate, this also had a role to play in the sell-off.

Sovereign Wealth Funds hugely benefitted

One of the less-noticed facts of this budget was the huge hero’s welcome that we have given foreigner sovereign wealth funds by exempting tax on al their equity, debt, mezzanine investments including capital gains on priority sector and infrastructure-related investments. This is a good move considering that we are seeing major Risk on sentiment emanating in China due to the coronavirus and such measures are a step in the right direction by the government in attracting incremental investment into India. This can signal a return of the FII investors in India who had partially exited. The sovereign wealth funds have deep pockets and a long term horizon and at the same time they don’t expect super high returns, so this is a key positive in kick-starting the investment cycle In India

The budget is not the end game, there are various factors affecting the markets that are all happening outside the budget, for eg we have a proactive government which makes policy announcements every month, with stuff like a corporate tax cut happening six months before Budget and we will be seeing more of this going ahead so, in short, the growth runaway for India inc is still very much in place and there is plenty of opportunities in their market and  we do not need to lose sleep over one budget 

Moving Beyond the budget

Improvements in Macroeconomic Data visible

India’s manufacturing PMI has hit an eight-year high of 55.3 indicating improving industrial activity, we have seen better core infra growth, GST collections have crossed the 1 lakh crore mark for 3 months in a row now and crude and commodity prices are coming down which will lead to lower cost of manufacturing for man companies.  The macro scenario has suddenly turned positive with multiple positive indicators, these are small changes but on the backdrop of benign economic news that we have been hearing for so long, it comes as a breath of fresh air.

RBI Policy addressing the much-needed issue of transmission of rates

In the last MPC meeting RBI has initiated an LTRO for 1 lac crore that is aimed at improving the transmission of credit, since the past 12 months, RBI has cut rates by 135bps although directionally RBI got it right the magnitude of transmission was low and today’s move aims to address that. The second thing is also lowering the cost for consumer loans as well as business loans. By removing these loans from the incremental NDTL for CRR purposes, the cost of borrowing can come down on the MSME and auto and housing loans.

Corona Virus?A big unknown but can it benefit India? 

The outbreak of the virus has sent ripples around the globe and most central banks and governments are still unclear on the situation. The first sigh of relief was some news articles suggesting that the magnitude of the spread of this virus is declining. Secondly, it is possible that there can be some advantages for India as China grapples with this disease.  Oil has come down to $56 a barrel, lower oil prices is always a great benefit for Indian companies, second many central banks have started cutting interest rates and easing liquidity some of this liquidity can definitely reach emerging markets Within emerging markets, many FPIs are exiting China and some big reallocation within EM portfolios will happen and India can get a higher share of FII flows.

Who will be the winners?

New Categories and fresh winners to emerge in 2020

2019 was the year of polarization but 2020 will see new winners emerge in the market! The money will be made in new categories and fresh sectors and that have recently debuted in the market, these category winners will be the stories that will be told in 2020.

Winners in the New Year will emerge from new frontiers of the market. So far we have seen a narrow rally emanating in the market with few stocks participating, most recently the risk-on sentiment has emerged that has led to some flight of capital towards gold, but in 2020 we will see demand for new age stocks, new-age companies and that too from the new listing space.

Now we believe that the “New listing space” – ie basically those stocks that have debuted in the market in the past two years are the ones where the winners will be born out of, this exclusive list has some peculiar characteristics, for starters

  • Sizable companies: Since 2018, quite a few companies have been listed and most of them are of decent size, which is 1000cr market cap and above, some of these names like insurance and AMC have also gone on to become large caps.
  • Under ownership – Many of these companies have little to no institutional holding and cant attract FII and DII interest
  • New-age business – there are many online players who have been listed, new categories in existing sectors that are a complete first for the market for eg Diagnostics business in the healthcare sector, platform companies in the internet space like Indiamart, Affle, Insurance and asset management companies in BFSI which did not exist earlier.

Summing up we have had a budget that is definitely a structural positive, a proactive RBI that have done their part in transmission, improving macros and an upbeat scenario for attracting foreign inflows, so all in all the rally in equities will continue upwards and we must also continue to remain invested to profit from this.

Our Plus Delta Portfolios research team is constantly working towards spotting the best opportunities to profit from this rise and this is a fantastic opportunity for investors to load up on the best stocks. 


Aditya Iyer
Fund Manager – Plus Delta Portfolios 

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