Accumulation opportunity

The government came out with Kings and Queens (if not aces) this Budget, given the limitations. The Budget was possibly themed on:

1) giving infrastructure sector a big push

2) keeping the taxation levels largely unchanged

3) improving the ease of doing business

The biggest takeaway from this Budget has been the government’s disciplined approach in maintaining the quality and quantity of the fiscal deficit. Government stuck to its fiscal deficit projection of 3.5 per cent (of the GDP) for FY17. This diligence on the fiscal deficit has raised India’s prestige and its standing—globally. This will translate into more respectful assessment by FIIs and credit rating agencies in the time to come.

On the net basis, the market borrowings for FY17 are projected at around Rs.4.25 lakh-crore-level, which is almost same as previous year. As a result, projected supply is lesser than the projected demand and will lead to a rally in the bond market. More importantly, the finance ministry seems to have kept its end of the bargain and has provided the incentive for RBI to act more firmly on the repo rate. We expect a followup rate cut soon by RBI in the coming days.

The consequent rally in the bond market may accrue nearly Rs.30-50,000 crore for the PSU banks from MTM gains. This, along with the Rs.25,000 crore capitalisation of the PSU banks, will improve the bank balance-sheets and also create a pivot for consolidation, privatisation and professionalisation in this sector. This fiscal leadership reduces the capital cost in the economy, provides ground to boost credit growth and stimulate private sector borrowing.

In closing, we believe that a path is being created towards a sustainable double-digit growth with two to three years’ timeframe. The expectation of a good monsoon this year, reduced borrowing costs, likely parliamentary approval to key reforms bill such as bankruptcy code and GST), and a strong infrastructure push give strength to this belief.

While we believe that debt will be the favoured asset class this year, this will be an opportune time to accrue equities. When the pent-up earnings growth will catch up, most of the retail investors will be surprised by the size and level of the leap the equities may take.

Investors are consequently advised to position themselves in the bond and the credit segment. So while many may have missed out on the rally in gilt (which we were forecasting), the yield levels in the private debt and the AA segment may still be lucrative for now.

From equities standpoint, we believe that the market is increasingly offering attractive opportunities for bottom-fishing investors. However, the sentiments remain lacklustre and may therefore remain in bear embrace for some time. Therefore, this is an accumulation opportunity for the investors. Investors are advised to take the SIP route to investing in the markets. Further, keeping aside a portion of the cash, which can be invested during market dips is advised.

olmdesk@outlookindia.com