Deepak Jasani, Head of Retail Research, HDFC Securities feels while direct and indirect taxes may not offer much scope to innovate or bring path breaking reforms (except those related to capital markets), the main focus could be on boosting manufacturing through schemes like PLI and to create jobs.
A Chartered Accountant by profession, Jasani expects the fiscal deficit to rise to 7.6 percent of GDP in FY21. He has a broad-based domain expertise of more than sixteen years in capital markets.
To meet the COVID vaccine related costs, the FM could introduce a ‘corona cess’. Disinvestment target for next year is likely to be ambitious as certain planned disinvestments for FY21 spill-over into the next fiscal. This Budget is important from the perspective of sovereign ratings, he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Q: Should one prepare for a bigger correction in coming weeks? And should one start buying if the correction takes place or should one let the market settle?
Indian markets are currently trading at high valuations going by historical standards. However global interest rates have never in the past remained so low for so long and hence the past valuation criteria may need to be seen in the changed context. Abundant liquidity and low interest rates have led to FPIs continuing to pump in large sums of money into Indian markets.
Having said that in case we witness any negative trigger globally (in terms of fresh US policies on trade or geo politics, other geopolitical troubles, China related issues, inflation or interest rates starting to rise sustainably or Central Banks giving indications of an early end to monetary stimulus) or local negative trigger (Union Budget outcome, Q3 results or guidance, interest rate or inflation movement on the upside) we could see a correction in the markets. The quantum and the time of correction will depend on the trigger that causes this correction as well as whether more negative triggers happen after the first one. Only after this is known one can take a decision about starting to buy after the correction.
Q: TCS, Infosys, Wipro and HCL Technologies, the top four IT companies have already announced quarterly earnings. What should investors do with these IT stocks?
IT is a long-term structural story for India given the hurry shown by global enterprises to digitize their operations to remain competitive and compliant. At different times the valuations of these stocks could seem fair or excessive; but soon they may again seem reasonable. Hence long term investors need not consider exiting them even if they seem temporarily overbought. Other investors who have the knack to time their entry and exit can look to trade in and out of them to make that extra buck.
While large IT companies look more solid in their business models and visibility of growth going forward, Tier 2 companies have their own niches and low base, which may result in them doing well whenever their core competence comes in demand or there is a M&A activity. Hence at times these companies may quote at valuations that are higher than the large IT companies.
Among large IT companies we like Infosys, HCL Technologies, TCS and Wipro in that order in terms of upside potential. However their entry levels will depend on their current prices, the return expectation of investors, their time horizon and risk appetite.
Q: What is your view on global economy for 2021 as western world is still facing COVID-19 crisis and lockdown measures?
Post the beginning of vaccinations, the fear of continued down turn in the global economies has reduced, even though we have seen emergence of new strains of the virus in different countries. Although the healthcare systems in most countries are good, low levels of compliance with preventive measures and relatively lower level of immunity due to health conditions have resulted in number of infections (and also number of deaths) being large even in developed countries.
However, once the vaccination reaches a large proportion of population, then these worries will subside and their economies will be back on the growth path by the second or latest by third quarter of this calendar year. Whenever these economies return to growth the pent up demand and supply chain deficiencies could lead to a sharp demand spiral across the globe, a smaller part of which was observed a few weeks back.
Q: What are those key risks (domestic and global) one should keep a note of them, in the year ahead? Also do you think Joe Biden’s policies will boost the US economy?
Any or more of the following risks could play out going forward:
>> Post Q3 results, if the street realises that the stocks (and the market) are overvalued/have run up ahead of time; based on fresh forecasts of earnings.
>> Budget disappoints in terms of levy of fresh taxes/surcharges, fiscal indiscipline, possibilities of interest rates rising sharply, raised expectations not being met.
>> Globally interest rates continue to rise and central Banks start getting concerned if inflation is also rising in tandem. End of easy money policy comes in sight.
>> Incoming President Biden makes noises about increasing taxes on US corporates/HNIs, increasing regulations on technology companies and taking steps that could impact profits of Pharma industry.
>> Debt to GDP ratio of countries and institutions reach dangerous levels.
>> Geopolitical event concerning Gulf, China or even India.
>> COVID-19 pandemic not coming under control and lockdowns become more frequent across the globe.
>> US dollar continues to appreciate, reducing the lure of emerging markets.
>> Going by the promises and expectations currently, Joe Biden’s policies could boost Infra spend in the US, put more monies in the hand of consumers by way of stimulus cheques. On the other hand, he may levy fresh taxes or raise the existing taxes on the rich and corporates, increase regulations on technology companies and take such measures that will impact the revenues / profits of pharma industry. Overall this may lead to a boost to the US economy for the time being.
Q: Few experts feel the Union Budget 2021 could be a historic one, especially after COVID-19 pandemic. Do you feel so? What are your expectations from the Budget and policy measures that could cheer markets?
The FM has raised expectations from the forthcoming Budget by planning a once in 100 years Budget. While Direct and Indirect taxes may not offer much scope to innovate or bring path breaking reforms (except those related to capital markets), the main focus could be on boosting manufacturing through schemes like PLI and to create jobs. We expect increased allocation for the social sector: MNREGA, education and health ministries. Spending by Consumers and Businesses (capex) could be given a boost to kickstart quick recovery.
To meet the COVID vaccine related costs, the FM could introduce a ‘corona cess’. Disinvestment target for next year is likely to be ambitious as certain planned disinvestments for FY21 spill-over into the next fiscal. This budget is important from the perspective of sovereign ratings.
We expect the fiscal deficit to rise to 7.6 percent of GDP in FY21. The combined fiscal deficit for FY21 (Centre + state) is likely to be 12.3 percent of GDP. For FY22, we expect Centre’s fiscal deficit target at 5.2 percent and states’ fiscal target at 4 percent with a combined deficit of 9.2 percent. Nominal GDP may be expected to rise 13-15 percent in FY22. To come back to fiscal correction path, the government has limited resources to boost spending by a large percent. A lot of reshuffling between expense heads may be undertaken so that needy sectors get funds while overall fiscal discipline is maintained.
PSU sector could be in focus by pushing them to perform in a market like manner. This could be done by giving their managers more freedom, linking their pay to performance and/or stock price movement, making targets based on RoE/RoCE etc. This will help improve their performance and lead to better realisation for the government upon divesting stakes in them.
Industries expect a roadmap for scrapping old vehicles, sops for electric vehicle industry and increased import tariffs to encourage domestic manufacturing. Government is expected to recapitalise PSU Banks to stimulate credit growth and offer fiscal support to COVID-hit sectors like hospitality.
Markets will look forward to a credible borrowing plan in the Budget including raising of money internationally at lower yields. India’s public debt to GDP in FY21 will be upwards of 85 percent of GDP. India’s combined borrowing for FY21 is upward of 15 percent of GDP eating away the resources available, hindering the credit offtake and pass through of accommodative monetary policy given that the net domestic household savings rate is just 6.5 percent.
Key would be improving the sentiments of consumers/businessmen. Only if the Budget is pathbreaking in terms of policies (Govt spending, divestment, revenue raising or capital market friendly) the current upmove can sustain beyond a point.
Q: Which sectors are likely to remain in focus ahead of the Budget?
Auto, PSU, Banks, Materials, FMCG are some sectors that could rise ahead of the Budget in anticipation of getting benefitted from the provisions of the Budget.
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