Union Budget 2021 – How to maneuver Equity Markets
Over all the budget looks good and is continuation of a series of pro-growth measures announced earlier such as PLI scheme, lower corporate tax etc.
As markets by today morning has already rallied towards all-time highs, we may not chase the markets. However, we will definitely use any dips to increase equity allocation. PSU segment continues to be attractively priced.
As regards the important/big ticket themes in the budget they are outlined below:
1) Govt has finally mustered the courage to go for a larger fiscal deficit to stimulate growth not only in FY 22 but also in the next few years giving a push/priority to growth.
2) Announcement with respect to Privatisation / Divestment has more leg than past. In addition to BPCL, Air India, CONCOR and LIC, two PSU banks and one general insurance company has been added to the list. Further FDI in insurance sector has been increased to 74%.
3) Various initiatives to spur Infrastructure development such as
a) increased Capex by Govt
b) addressing the issue of foreign participation in infrastructure financing through the INVIT and REIT route
c) announcement pertaining to development financial institution to fund RS 5 lac Crs of infrastructure projects
d) preferential tax treatment for zero coupon bonds issued by notified IDF
e) commitment of over 1 lac Cr for electricity distribution company and so on
f) plans to monetise Assets like dedicated freight corridors and various road projects etc, will release funds for further infrastructure development.
Our overall take on the market and the risks going forward
While the budget is good and further extends the pro-growth policy measures announced earlier, we do see following risks
(1) As the economy starts firing, tighter monetary policy could lead to rising yields. This along with inflation rearing its head can act as a significant headwind as regards the equity markets, putting a lid on further rise from current NIFTY levels of 14,700.
(2) We also feel that if the Govt. is not able to meet its aggressive divestment targets, then its spending ability will be impacted dampening the growth stimulus.
3) On the other hand, revenue collection has been estimated based on realistic and not stretched assumptions. At the same time, several tax compliances measures, will ensure that collection does not fall short of estimates.
4) US markets have had an extended bull run for over 10 years now. While they may not see deep correction, we do not see the bull run extend too much further, from the current levels. This will be neutral to negative to our markets.
Net Net at current levels we are somewhat positive on the markets and plan to use dips to increase equity allocation.
As regards the Fixed income markets, we will move money to the 1.5/2.0 year duration, in Govt & AAA/AA+ corporate papers, to reduce duration risk as yield curve rises. At the same time, we will avoid the liquid end as it yields merely 3% currently.