Budget 2019 is an attempt by the Government to lay out the road-map of economic revival through investment led growth. This is in contrast to the consumption backed growth that India has been enjoying for nearly a decade. In order to achieve this, the Government intends to significantly lower the cost of capital. At the same time, the Government has reduced its FY20 fiscal deficit target to 3.3 percent of GDP from 3.4 percent set in its interim budget.
The Government’s announcement of raising a part of its gross borrowing program in external markets through foreign currency is a strategic step which is a positive for the economy. This is because 34 percent of the global sovereign debt yield today is in the negative and another 15 percent of the global sovereign debt is between 0 to 1 percent. As a result of such lower rates prevailing globally, there could be a possibility of huge inflow into a good sovereign like India. While this is a positive and a supportive move for lowering interest rates leading to economic growth and Rupee in the near term, there could be challenges if the Rupee appreciates rapidly. So, it is important to ensure that that long term debt fund flow should be used for fueling capex and not consumption.
The other pressure point that the Budget has addressed is the measures to address NBFCs revival, bank recapitalisation and deepening corporate debt markets. The allocation of Rs 70,000 crore for recapitalisation of state-run banks is a step that is likely to help PSU banks which have been cash strapped. Separately, the Government’s decision to provide one-time six-month partial guarantee of Rs 1 lakh crore to state-run banks for purchasing consolidated high-rated pooled assets of financially-sound NBFCs is a welcome step to enhance liquidity for NBFCs.
Amidst these positives, the one area which looks unlikely to recover anytime sooner is the consumption space. While the consumption slowdown has been on for some time, spends among the high income individuals were relatively robust. However, with the new tax regime a slowdown in this pocket too is likely. As a result, a slowdown in luxury car market, high end real estate and consumer discretionary space is likely. In effect, the consumption slowdown could be prolonged than earlier envisaged given that the lack of stimulus in this area.
From a valuation perspective, markets are not cheap, barring certain cyclical stocks. Post elections, our outlook on equities has improved. While equity as an asset class tends to perform well on favourable election outcome, in the long term, the market seeks direction from macro-economic indicators. Those investing with an investment horizon of at least five years can consider SIP in mid and smallcap fund. In case of lumpsum investment, one can opt for balanced advantage category of funds. Also, the valuations disconnect between growth and value stocks can be played through Value and special situations theme.
In terms of debt investment, we believe the liquidity situation is likely to improve and interest rates to come down. This is a positive for short end of the yield curve. In the coming quarters, the spread compression is likely to play out owing to which we are positive on the one- to three-year segment of the yield curve. The other segment we are positive on is the credit schemes, as they provide better carry and good margin of safety at this point in time.
S Naren is Executive Director and Chief Investment Officer of ICICI Prudential AMC.