January 19, 2020
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No Direction Home

There is no reason for an individual investor to change a portfolio based on this or any budget.

No Direction Home

This budget started out with negative expectations of being high on populism and fiscal disorder. But it is actually closer to reality. It seems that political compulsions have made the finance minister cautious in producing a budget that is free of controversy and will pass easily. There are some positives like the thrust on infrastructure and the doubling of the bond issues. Other infrastructure sectors like power and fertiliser are also likely to benefit as the budget has tried to address the energy security issue. The auto sector may see a lag in sales due to the rise in excise duties. And a lower withholding tax for ECBs should lower the cost of capital for sectors like aviation. The big question is whether foreign banks will choose to lend to them or not.

On the other hand, government borrowings are higher which will put pressure on interest rates. Plus the rise in service tax and excise duty could be inflationary. Some overshoot on subsidies can be expected, especially if diesel prices are not hiked due to political pressures. For retail investors, the Rajiv Gandhi Equity Savings scheme does sound interesting, although details are awaited. It may have needed to be larger to attract serious retail money in the stockmarket. From the market’s perspective, this budget is more of an accounting exercise and we don’t see a large impact. There is no reason for an individual investor to change a portfolio based on this or any budget.

We still like autos, banks, consumption stories...but real estate, for us, is an absolute no-no.

This budget will have some positive, though marginal, effect on the tax rebates available on new investment in equities. In general, the portfolio churn in response to budgets has very limited impact on the portfolio returns. In this year, given current conditions, retail investors can expect debt to give pre-tax returns of 8-9 per cent and equities, if all goes well, approximately 13-15 per cent. From the markets’ perspective, some liquidity impact in terms of encouraging foreign flows may be there. The directional move towards the dtc is welcome—however, there are no clear timelines. The changes in the personal taxation slabs are not significant.

In terms of sectors, we still like autos and banks, consumption stories, selected private banks. Real estate, according to us, is an absolute no-no. This strategy is unaffected by the current budget. Infrastructure companies will benefit from the budget. But with higher debt and higher interest rates (and given poor execution and corporate governance), one has to be very selective in stock picking. The stocks have risen recently and will tend to be very volatile. FMCG will continue its steady performance. I think the lack of firm fiscal consolidation and the service tax measures will prevent the RBI from cutting rates soon. Setting a target for 5.1 per cent fiscal deficit is a good start for fiscal consolidation but it all depends on how the government pans out on its policymaking and reforms beyond the budget.

Devendra Nevgi is founder, Delta Global Partners

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