Joseph Thomas, Head of Research, Emkay Wealth Management
Joseph Thomas, Head of Research at Emkay Wealth Management, says the budget is often seen as a trigger for the market to move up or down. “If the market perceives the proposals and the estimates as realistic, then it will be positive. The stock market moves on how it impacts corporates — what are the provisions that could help earnings growth.”
Thomas feels retail housing will get a thrust in the budget. “Housing is one of the primary or basic needs that is yet to be met for the majority of the population. In the last few budgets there was an accent on housing, and the government may initiate some novel measures to enhance the reach and impact of those schemes in the coming years,” says Thomas, whose experience tracking the economy, markets, portfolios and financial products spans three decades.
Edited excerpts from an interaction with Moneycontrol follow:
Will the budget focus more on populist measures, especially ahead of State elections, or will it be a growth-focused budget?
See, it is very difficult to make a clear distinction between a populist budget and a growth-oriented budget. Usually, the union budgets as well as State budgets in India, combine both features. Being populist is part of providing some immediate benefits to the common man in taxation and savings rates etc. and being growth-oriented essentially means long-term benefits that accrue to all.
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The tax concessions to corporates fall in this category. In this connection, I would like to point out that in the last few budgets there was a significant accent on social development that benefits society at large. When there are elections, government spending goes up, and this is the observed behaviour of governments in India. Therefore, as it was in the past, the current budget, too, is expected to tread a path that harmonises the requirements of both short-term and long-term growth and development.
Will the government focus more on sectors that generate more employment or sectors most affected by the pandemic?
Of the sectors affected by the pandemic, most have come out of the distressful conditions, including contact sectors like hotels, travel etc. Though the current third wave of infections may affect them to some extent, it may not completely undo the progress made in the last few months. The Government had initiated various measures that were sector-specific during the pandemic and the shutdown, and some of these measures may be continued or carried forward very selectively.
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The distressful conditions that prevailed during the pandemic no longer exist. Therefore, the government may curtail such schemes in the interest of expenditure rationalisation. Yes, the accent on employment generation will definitely be there. The infrastructure sector may get a lot of attention in this context. The focus may be stepped up this time as employment generation, too, needs to be addressed on a priority basis.
What could be the surprising element in the budget, if any?
It is expected that retail housing will get a thrust in the budget. Housing is one of the primary or basic needs that is yet to be met for the majority of the population. In the last few budgets there was an accent on housing, and the government may initiate some novel measures to enhance the reach and impact of those schemes in the coming years.
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What could be the factors that can drive the market rally on budget day or persuade FPIs to pump in money on budget day?
The budget is often seen as a trigger for the market to move up or move down. If the market perceives the proposals and the estimates as realistic, then it will be positive for the markets. The stock market moves on how it impacts corporates, what are the provisions that could help earnings growth. We need to look at it from the perspective of both domestic investors and foreign investors. For example, one of the important things that may be focussed on could be an extension of the production linked incentive scheme introduced by the government against the background of the pandemic to promote local manufacturing. This has already generated interest from corporates and may be useful in attaining import substitution in many key areas.
The disinvestment plan is something that could be an assessment tool. Disinvestments have not always been on track and the shortfall against estimates or plans has been a matter of concern. The LIC IPO is going to be on soon, and the ones that did not fructify during the year may be looked at closely for their probable revival next year. Yet another factor that may be important for both domestic and overseas investors is the fiscal consolidation path the budget charts out. The quantum of government borrowings has consequences for the market as it puts pressure on available resources and also on interest rates. It is also important that the government initiate some measures to boost consumption, something that has not received much attention so far. Overall, the market expects consistency and continuity in relation to the earlier policies and programmes.
How do you read the corporate earnings announced so far for the December 2021 quarter?
The corporate earnings overall are expected to be in line with the estimates, though quite a bit of the EBITDA (earnings before interest, tax, depreciation and amortisation) compression seen last time may be a reality this time too. The results that we have seen so far are satisfactory, and the most splendid performance came from the top-rung tech companies, who have benefited from enhanced digitisation, artificial intelligence applications, and the swift revival of the US economy and Europe. Pressures are likely to emanate from the gradual slowdown in GDP growth, persistently high inflation and high input costs.
Beyond the Budget, what are the other important events or factors to watch out for in 2022?
Apart from the Budget, we will be having policy announcements from the RBI and the Fed from time to time, and these policy meetings and announcements are expected to set a new course for the global economy and the markets. Developments around China are also of consequence to the world, as some authentic reports originating from the US suggest that its real estate-related issues are far from over, and there could be more problems in the days to come.
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 by the expected rate hikes by the Fed, inflation and Covid?
The last two years provided investors with supra- normal returns. Such returns are never sustainable. Over the long term, returns get normalised. Therefore, investors need to get their expectations too moderated to much lower levels of returns, like 15-20 percent. We should keep in mind the fact that the high level of liquidity and easy money policy from the central banks facilitated P/E expansion, and with liquidity normalisation polices being aggressively pursued by central banks, some correction needs to happen in the market levels.
While the third wave of Covid may create some disruption it will be minor compared to what we had seen in the first two waves. Therefore, its impact will be small. The persistently high inflation in the US and the shift in the US money policy to a tightening mode will have its impact on the markets. Higher US Dollar rates would support movement into US Dollar assets as the currency yield is bid up. There could be major shifts and realignments in the US market, which has seen only one-way movement in the last three to four years.
Apart from the US, even the UK and most parts of Europe, and India are facing high inflation. Rising fuel prices, with Brent at $ 89 will be a challenge for many global economies, and this may invite policy tightening over a period of time. But the markets are used to the technique of pricing in anticipated policy moves ahead of time. So, any corrective downward movements may be understood from this perspective.
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