The FY22 Union Budget met most of the market expectations with hardly any negative surprises. The key expectations were hinged on job creation through infrastructure spending, focus on healthcare and welfare schemes, and maintenance of existing tax structures.
Not only did it meet these expectations, but also managed to convince the markets that this will be achieved without a major hardening of bond yields.
Whilst the 10-year G-Sec bond yield hardened slightly, considering the broad contours of tax collection and the government’s borrowing program, the yields are likely to remain manageable.
The most critical aspect of the Budget is that it is growth-oriented with a significant expansion of government spending. The Budget will help in reviving the economy which was sluggish even before the pandemic.
The post-pandemic demand and significant increase in government spending have set the course for a strong demand revival.
The 2020 rally was broad-based and it is gaining more traction in 2021. The current indicators show a strong indication of a structural bull market similar to the 2004-2007 cycle.
While they say history repeats itself and the current structure has all the markings of the 2004-07 CAPEX cycle, we believe that history more often rhymes than actually repeating.
This means while the CAPEX cycle plays will see ascendance, the structural trends of more digital adoption, discretionary consumption, and formalisation will continue unabated.
With these themes serving as a backdrop and further aided by solid global liquidity and all-time low-interest rates, the bull market rally could be one of the strongest.
The key macro themes will be as follows:
Budget tilts in favour of cyclical and rate-sensitive sectors:
The whole industrials cycle has been a major laggard over the last decade. Sectors like Real estate, capital goods, infrastructure, corporate banks, and metals have been major underperformers.
These sectors have seen significant value destruction also over the decade, but 2020 saw a significant improvement in these sectors. The structure emerging for these sectors globally also is a significant positive.
The Union Budget with a consistent focus on capital spending has provided further impetus to these sectors. So, expectations are getting built for industrial plays also but the industrial cycle pick up takes more time and needs private investment to pick up significantly.
This is more likely in FY23, but considering the market liquidity, future growth gets factored into the prices quickly and allocation is likely to tilt towards industrial plays also.
Automobiles sector likely to deliver solid returns in 2021:
Our focus on the automobiles sector continues as auto volumes continued to be strong in January. Earnings were a mixed bag with Bajaj reporting a very strong set of numbers while Maruti reported disappointing margins.
However, the sector continues to see strong traction, and the booking trend continues to be robust.
‘Value’ and ‘Growth’ to be the dominant themes from here on:
We now believe that ‘Value’ and ‘Growth’ will be the top themes for 2021. As the economy improves value’ stocks will see a significant improvement in the financial metrics.
Also, the broader economic growth will mean strong earnings growth as well. Quality could take a back seat as ‘Buy Quality at any price’ theme may not work as there will be multiple opportunities across sectors with improving financial metrics and earnings visibility.
Nifty December target is at 16,000 with further upside risks:
The major change in the market structure will be mean re-rating of sectors that have lagged for a long period. Even as sector rotation plays out, valuations across sectors like Consumer, IT, and Pharmaceuticals are likely to sustain while industrials, cement, real estate, and BFSI will re-rate.
With a target multiple of 22x on FY23E earnings, the target for December 2021 works to 16,000.
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