Ajay Garg is the founder and Managing Director at Equirus Capital
Ajay Garg, founder and Managing Director of Equirus Capital, says any tax relaxations on capital market instruments in Union Budget 2022 will bring cheer to the market. Finance Minister Nirmala Sitharaman will present the Budget for 2022-23 on February 1.
Currently, growth is the need of the hour and broad-based growth will ensure the larger victory of politics as well, says Garg. Therefore, “we expect the government to focus on growth, especially via capex and measures to incentivise productivity and growth.”
Will the budget focus more on populist measures, especially ahead of State elections, or will it be a growth-focused budget?
This government, we believe, has been very fiscally prudent, in the sense of aiming to rein spending towards productive outcomes. Elections (especially State polls) in India are a factor that perhaps run through each of the years between Central (general) elections. Currently, growth is the need of the hour and broad-based growth will perhaps ensure the larger victory of politics as well. Therefore, expect the government to focus on growth, especially via capex and measures to incentivise productivity and growth.
Also read – Budget 2022 expectations: Education sector seeks tax concession, low-cost loans and expansion of 80C deductions
Will the government focus more on sectors that generate more employment or sectors affected most by the pandemic?
Evidently, the sectors in India that generate employment currently are also among the sectors affected most by the pandemic. In India, the services sector dominates GDP (65 percent) and these sectors (travel, real estate, transport, hotels) are perhaps the most affected as the pandemic has directly impacted mobility.
Since the onset of the pandemic, the government has been supportive in terms of providing financial forbearance to most of the affected sectors. One can expect some part of the financial forbearance to continue. However, the focus of the budget will be revival of growth and capital expenditure of the government and not the pandemic. We expect the pandemic is largely out of the way and the economy is no longer at the point of “pandemic protection” but rather “growth redemption”.
What surprising elements could the budget have, if any?
The surprise element can come from two factors: a) on the divestment side b) the overall fiscal deficit glide path.
On the investment side, the consensus is largely on LIC IPO proceeds coming in next year.
If they can show that they can deliver LIC this year and thereby lower the fiscal deficit targets this year, and in addition, have an aggressive divestment pipeline next year as well, it will be a good surprise.
On the fiscal side, a quick fiscal deficit glide path bringing it closer to 3-3.5 percent in the next 2-3 years could bring some cheer to the market, as this will mean the government will borrow less and the case of crowding out private capex will not happen.
Also read – Budget 2022: Nominal GDP growth may be pegged at 12.8% in FY23
What are the factors that can drive a market rally on budget day or persuade FPIs to pump in money on budget day?
Any tax relaxations on capital market instruments will bring cheer to the market. For instance, there has always been a call to do away with long-term capital gains tax on equity, or relaxation of the much-talked-about taxation of foreign investments in debt securities or reducing the taxation on long-term debt instruments. In addition, a focused, realistic budget with emphasis on growth and capital spending can bring cheer to the market in itself.
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How do you read the corporate earnings announced so far for the December 2021 quarter?
Corporate earnings have so far been steady. Yes, margin pressure may be building up because of input price pressures — expect that to be a key factor to watch out for. That said, looking at the fundamental growth trajectory for India on both consumption and investment led by government support and thrust, we are positive on corporate earnings going forward. We believe that there will always be pockets of opportunity in all markets (bull/bear/flat) and the skill of an analyst or investor lies in identifying those opportunities.
Beyond the Budget, what are the other important events or factors to watch out for in 2022.
One can expect 2022 to be an “eventful” year. Even as we speak, there is an upcoming Fed policy before the budget that is expected to turn out to be hawkish and indicate faster rate hikes (either by quantum or by number or both) and quicker unwinding of the quantum of asset purchases. In addition, crude is turning out to be a sting in an already-uncomfortable inflation trajectory, not just for India but the world at large. The world is perhaps witnessing multi-decadal-high inflation, the trajectory of which will be interesting to watch. Amidst this, how will growth fare and in what shape will it evolve? Surely it will not be uniform and unidirectional. Different countries may have different experiences. Lastly, how will our silent enemy, Covid, be subdued? Needless to say the world will have its plate overflowing this year.
Do you expect the market to give double-digit returns in 2022 and the Nifty50 to close the year above 21,000? Also, in 2022, do you think the market will still be worried due to the three expected rate hikes by the Fed, inflation and Covid?
We think the worry over rate hikes will be more of a near-term phenomenon, more of a first half event than second half. Typically, it is the run-up to the action of the rate hike that causes more volatility than the act itself. Therefore, once the market is settled about the rate hike and direction, we expect stability to return.
As I said, there are many moving parts this year in terms of the Fed, Inflation, Covid, Crude, Commodities and so on. One interesting cue to perhaps take from crude itself is that, post a nervous reaction to the onset of Omicron at the end of November 2021, the recovery has been one-sided and dominant to the extent of reaching 2014 highs. Perhaps the rest of the market will also behave in a similar fashion once the uncertainty is out of the way. While one can expect a roller-coaster ride, we think the first half will be the peak of the ride and the second half will be returning to the base.
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