Financial is the sector to be in given the expect expected growth in government and private consumption expenditure that is gradually feeding into the capex cycle, said Kashyap Javeri of Emkay Investment Managers
The Fund Manager at Emkay Investment believes Budget 2021-22 kept the focus on growth by providing fiscal glide path till FY26.
edited excerpts:
Q) What should be investors’ strategy post Budget?
A) The Budget 2021 has clearly highlighted the government’s preference for spending on infrastructure. The revenue expenditure in the Budget for 2021-22 is likely to remain flat whereas, the capital expenditure (excluding defence) is likely to grow by 29 percent. The government has also highlighted its intent to continue to spend to push growth. We expect the strong growth in capital expenditure to result in a feedback loop for domestic savings which will rise with a lag effect. We also expect the strong government expenditure to feed into growth in private consumption expenditure and which will eventually lead to the need for corporate to get into capacity expansion over the next 12-18 months period.
In light of the above assessment, our preferred sectors would be financials, low debt/debt-free infrastructure companies. We also like auto ancillaries as a quasi-play on strong private consumption expenditure as well as exports. We also believe that COVID-19 has accelerated the spending on IT locally as well as globally and it could be a multiyear spending story. Last but not the least, we have always been a believer of Indian CRAMs story in pharma as well as agro.
Q) At a time when equities are soaring to record highs, should one reduce their exposure to equity and increase exposure to other asset classes?
A) Valuations at times are a relative concept and need to be seen in line with global interest rates scenario also. The global interest rates and liquidity are likely to remain benevolent for a much longer time, given that central banks world over are likely to run loose monetary policy to support growth.
Having said that, we would keep a close watch on two things, inflation and absolute valuations of stocks. If the stocks have run ahead of fair value, we don’t mind booking profits.
Q) After the Budget and December quarter earnings, what sectors one should one add in their portfolio and why?
A) Keeping in mind the expected strong growth in government and private consumption expenditure and that gradually feeding into capex cycle, we believe financials is one sector where one has to be. As highlighted above we also like IT, CRAMs, auto ancillary and consumer discretionary sectors.
Q) Which are the sectors that should be avoided?
A) While there is no particular sector that we would like to avoid, we usually do not dabble into cyclical and high debt companies within a particular sector. Also, one needs to stay away from companies which may be impacted due to technological disruptions like EV.
Q) What is your take on December quarter earnings announced so far?
A) We believe there is a scope for upgrade in sectors like financial where COVID-driven pain on asset quality as been far lesser than expected. Hence, positive surprises can be expected in both, consumption-driven loan growth as well as provisions. We continue to expect that Indian CRAMS (contract research and manufacturing services) story can be multi-year growth story driven by robust chemistry knowledge of Indian companies and also government push for exports.
Q) How would you rate the Budget on a scale of 1 to 10?
A) The Budget 2021-22 has kept focus on growth by providing fiscal glide path till FY26 which highlights higher fiscal deficit until then. However, it has also been unconventional in a way that the Finance minister has also highlighted that from hereon, the capital expenditure is likely to grow faster than revenue expenditure. In that context, the Budget is also not pro-cyclical or inflationary in nature. We would shy away from rating this Budget as yet because we would like to see if the path shown by the Finance Minister is followed in the next Budget too.
Q) Bank Nifty rose 17 percent in the Budget week, what led to the rally? Do you think the creation of bad bank will solve the NPA problems?
A) The Budget 2021-22 has clearly highlighted that the fiscal deficit will run high until FY26 as that is when the government will start reverting back to FRBM targets. Having said that, two things are important to note here (1) the RBI has made unequivocally clear that it will run accommodative and pro-growth policy until it is needed and (2) as we highlighted earlier the Budget expenditure per se in not pro-cyclical or inflationary in nature. We believe that if inflation and consequently interest rates remain stable, it will be a good period for banks.
The banks have already recognised and provided for the asset quality pain that got created over the last few years. However, the resolution of these already provided assets can give a good boost to the capital of banks. However, the structure of ARC will be very pertinent to note, as usually, the banks themselves fund the ARC which buys their own assets. Thus, resolution if not capital consuming will be great for banks in general and PSU Banks in particular.
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