Swati Kulkarni is the Executive Vice President & Fund Manager – Equity at UTI AMC
Swati Kulkarni, Executive Vice President & Fund Manager, Equity, UTI AMC, says the expansionary approach that last year’s budget took will continue with the objective of supporting growth by focussing on large employment-generating infrastructure spends as well as incentives to boost localisation.
For a few years now, policy announcements have been made throughout the year and not reserved for Budget day. “In that sense we do not expect the Budget to have throw any major surprises. The roadmap on budgeted capex and next year’s capex will be important to watch out for as the key catalyst for a multiplier effect on economic growth.”
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The market corrected more than 6 percent in the last two weeks but remained volatile overall and has been in a range. Do you think it will hit its recent low before the Union Budget?
Rich valuations across market capitalisation amid the possibility of liquidity tightening, sticky inflation and firming up rate actions are the key catalysts for a market correction and heightened volatility. Estimating the market levels is neither our expertise nor a factor in our investment decisions, so we will give it a pass.
What could be surprising elements, if any, in the Union Budget?
For a few years now, policy announcements have been made throughout the year and not reserved for Budget day. In that sense we do not expect the Budget to have any major surprises. However, it could give us some insights into the government’s thought process to support the economy. Consumption growth, which has been the main GDP growth support, has been adversely affected in the last couple of years owing to the pains of the pandemic and commodity price inflation. There is an expectation of tactical support for the lower strata of the population and the rural economy, lack of which could be a negative surprise.
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Also, capital spending is lagging the budgeted outlay for the year. The roadmap on budgeted capex and next year’s capex will be important to watch for as the key catalyst for a multiplier effect on economic growth.
What could be key announcements that would lift the market sharply on budget day?
We think that the expansionary approach that last year’s budget took will continue with the objective of supporting growth by focussing on large employment generating infrastructure spends as well as incentives to boost localisation. There could be important announcements on high-speed rail, river-linking projects, and a roadmap for green energy adoption.
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This year so far, revenue receipts have grown higher than budgeted, more than offsetting the likely shortfall in estimated disinvestment proceeds. The higher nominal GDP growth will lead to a lower than estimated fiscal deficit to GDP ratio. We could see a correction in the 10-year G-sec yield if the borrowings needed are lower than estimated. Given the fiscal constraints, we do not expect any market friendly measure that can move up the market sharply.
Do you think the government will announce a growth-oriented budget or a populist one (especially ahead of State elections) on February 1?
As I said earlier, certain sections of the economy, including rural India, still need support to deal with the challenges and five states will soon get into elections. So, the Ministry of Finance is likely to address these. However, for long-term structural economic growth, a roadmap for capital spending that supports employment generation, attracts private investment and higher-value-add local manufacturing is very crucial to ignite the sustainable multiplier effects benefit. Thus, a balanced approach is expected from the budget.
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Will FIIs remain net sellers in the first half of 2022 given the risk of rate hikes by the Fed and rising inflation concerns?
Globally, inflationary pressure has been persistent as against policymakers’ expectations of it being ‘transient’. As of now, the Fed has signalled a measured approach with gradual rate hikes and a watchful stance to see if inflation can be tamed to the comfort zone of 2 percent and that the future course will unfold on that basis. The recent selloff has been triggered by the movement away from risky assets on the expectations of multiple rate hikes and a liquidity unwind by the Fed that other central banks may follow.
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We believe long-term investors could find value as the markets correct and cyclical recovery gains pace globally. Domestically also, with macroeconomic indicators in the comfort zone, if commodity prices soften, demand recovery and volume growth could lead to margin improvement and better earnings growth; with market corrections, valuations could also improve. Increased retail participation in MFs in a more structured way of monthly SIPs, and investments by long-term investors like PF and Pension funds have led to strong counter-balancing support of DII flows offsetting the pressure from FPI Outflows. Thus, persistent outflows for the entire first half appear unlikely.
What is your reading on the corporate earnings announced so far? Also is it a major reason for the current call in the market?
We observe that for most manufacturing companies, raw material cost inflation has led to declining gross margins as companies have not been able to pass it on fully to customers. Most revenue growth is price led and volume growth has remained low, leading to poor fixed-cost absorption and falling operating margins in general. The full impact of a price increase is yet to come in revenue growth as these were taken in the latter half of the quarter.
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Global cyclicals like metals, and oil & gas, on the other hand, are reporting better numbers with firm prices and improving margins. IT Services companies are reporting strong topline growth, deal wins and a deal pipeline, but are facing margin pressure from rising employee costs as they spend more to retain talent and deal with rising attrition. Entry-level mass recruitments are likely to bring cost benefits gradually. Banking and Financial companies are reporting improving asset quality, rising coverage ratios and some improvement in Net Interest Margins. Though select segments show healthy loan growth, the overall loan growth reported remains low.
We have discussed in the past how elevated valuations render no comfort for any disappointment in earnings delivery. Added to this were the expectations of persistent inflation, a tightening rate cycle and drying liquidity, all of which may have led to correction.
Apart from the Budget, what are the key events to watch for in 2022 and which of those events could hit market sentiment?
The key variables that could heighten volatility are liquidity tightening and sharp interest rate movement above expectations, continued supply disruption leading to persistent high inflation, high crude oil and commodities prices, and poor earnings growth. Negative surprises on an expected global cyclical recovery and domestic growth could hurt sentiment in the near term.
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