Interim Budget 2019 is pro-farmers, laborers, small tax payers and youth. The fiscal spends were increased for meeting the developmental needs of the economy across agriculture, defence, electricity, animal husbandry, fisheries etc. Yet, the finance minister managed a fine balancing act by sticking to fiscal discipline. Fiscal deficit for FY19 (current financial year) at 3.4% of the GDP is a minor slippage of 10 bps over the budgeted estimates. The current account deficit for FY19 remains contained at 2.5%.
As for the socio-economic agenda, the budget focused majorly towards reducing the rural distress in the country. Accordingly, the finance minister has rolled out a
welfare package for the farmers which will cost the government Rs 75,000 cr for FY2019-20 and is expected to benefit nearly 12 crore farmers Pan India.
The budget brought a major relief through a slew of measures for the middle-class taxpayers. Indisputably, the key highlight was the
tax exemption of income up to Rs 5 lac per annum. This move will boost the disposable incomes and purchasing power in the hands of individual taxpayers, in turn increasing low ticket consumption.
Further, gross income up to Rs 6.5 lakh will remain tax exempt for taxpayers, if they invest in prescribed equities like
Equity Linked Savings Scheme (ELSS), Provident fund and Insurance. Such tax breaks will go a long way to incline Indians towards financial savings. As a cascading effect, we are bound to see more and more new investors joining the equity bandwagon in the coming years.
Another notable positive is the government’s attempt to revive the real estate sector. The Budget has proposed to provide the benefit of rolling over capital gains for the investment made in
two residential properties (earlier the benefit was limited to one property). A notional rent earlier applicable to the second house has been waived off, considering the situational needs of citizens like migration for job opportunities or family reasons. Key tax breaks for construction of affordable homes and other incremental measures indicate that the government is looking at real estate as an essential driver to augment the overall economy.
The Budget also launched a mega pension scheme for workers in the unorganized sector offering a monthly pension of Rs 3000 per month after the age of 60. For the ailing micro, small and medium enterprises (MSME) sector, the budget incentivised with an economical flow of credit, through 2 percent interest subvention for loans up to Rs 1 crore.
In all, a series of impactful tax breaks for income tax payers coupled with
farmer benefits should be positive for consumption and auto. Further, infrastructure, banking & sectors deriving benefits from rural growth, stand to benefit.
We believe the equity markets are likely to be volatile in near to medium term. This is based on historical data which shows that election years tend to be volatile for markets in general. In the past, during all the key election years (2004, 2009 and 2014), markets have provided investors with intermittent opportunities to invest. In such phases, the best investment strategy has been to use the systematic investment route to accumulate equities.
This is the time when investors should stay put, and systematically invest through the year, keeping emotional undertones at bay. Across market cycles, it is seen that an accumulation phase comes as a precursor to a bull run. Therefore, it is important to be patient and stay invested throughout this phase to make outsized gains in the likely ensuing market uptick. For instance, from 2010 to 2013, stock markets were largely range-bound and even meandered lower. But, for those investors who held their ground and stayed invested based on conviction, the best returns came in the years 2014-17 when stock markets entered a bull phase.
Amidst all these there are a few factors that investors need to watch for; one would be the US Fed’s stance on interest rates; the most recent strikingly dovish stance is a clear positive. We believe that a meaningful rally in Indian equities is likely only when the US Fed will be done with its tightening. Also, that is when the accumulation cycle is likely to end, as well.
Hence, the current investing climate is conducive for investors to initiate or continue with their systematic investing into equity assets such as small-caps, mid-caps and value funds. Yet, again when making lump sum investments, balanced advantage funds and equity savings funds should be the preferred vehicles. This is because such categories of fund have exposure to both equity and debt and hence provide a margin of safety if things get choppier. In terms of themes, special situation and benefitting out of volatility are the themes we are positive on.
In debt, we are positive on low duration funds (investing in instruments with maturity in the range of 1-3 years) which can mitigate interest rate volatility and accrual schemes which can capture the current elevated yields and dynamic duration schemes which can benefit from volatility.
S Naren is Executive Director and Chief Investment Officer of ICICI Prudential AMC