Equities, Some Cheer on Budget Expectations

The normalization of liquidity initiated by the central bank gathered pace in the last two months with an aggressive approach towards variable rate reverse repos. This has obviously resulted in market rates moving higher. The normalization of liquidity is expected to normalize the returns from various asset classes including equities too over a period of time. This normalization is already happening if one takes closer look at the progression of returns. Yet another premise was that the returns which were obtained in the last year or the year before that was supra- normal and too high, and that by itself was not sustainable. This would require investors to moderate their expectation from equities in the current year. This assumes greater importance because there could be tightening of rates from the central bank in response to future macro developments like the level of inflation and the state of government finances.

The equity market saw exit by overseas investors in the last few months, and it may continue for a while before it peters out. This is because of mainly external developments which are more US-centric. The US has entered a phase of aggressive liquidity normalization and rising interest rates. It is the high rate of economic growth and the accompanying high level of inflation that has led to the policy modifications in the US. During such events, usually funds which initially moved into emerging markets would move back to the US. In the Indian context the outflows on account of the overseas investors has been more than made good by the inflows into equites through the mutual fund route mainly through systematic investment plans which is actually retail money. The inflows touched a record Rs.11500 Crs last month, much higher than the average of close to Rs.9000 Crs in the preceding three months. These inflows dwindle, going by the past experience, only if there is a shift in the sentiment and wide variations in expectations.

The earnings season has just started, and the results are expected to be more or less in line with expectations, except for the ones where the impact of higher input costs and commodity prices have had a direct impact. Also, on a quarter-on-quarter basis there is a slow down in the overall rate of economic growth and this may gradually get reflected in the growth of some of the basic industries. The first few results have given a lot of reason to cheer as the frontline tech companies have beaten the estimates and the outlook is much brighter than it was at any time in the recent past. These companies make investment sense as within the sector itself the larger companies are less expensive in valuation compared to the mid sector companies. They will also be able to take advantage of scale in the rapidly evolving areas of digitization, artificial intelligence applications, and rising spends in major territories like the US and Europe, post a major part of the pandemic.

One of the potential triggers for the market is the Union Budget which is due in the first week of Feb. and the budget will be keenly watched for certain basic things. The outlay on infrastructure is one of the key components of growth and expenditure related propositions which will be closely looked at. The fiscal consolidation path is another important factor which is relevant from the point of view of government finances and economic stability. This is more important for overseas investors as they look at stability of the economy from the currency perspective as well. The PLI scheme which the government has announced earlier in its efforts to support local manufacturing in the midst of the pandemic is showing results, and its follow through in the budget for further incentives is another key factor that may give support to the economy and the markets.
We continue to suggest investments into well managed funds with a good track record, both in mutual funds and portfolio management services. The prospects of stable long-term growth puts the domestic economy well ahead of others, and the performance of the equity markets too.


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