Fiscal pressures building up; risks for the markets are rising: Jefferies

Fiscal pressures for the Indian economy are gradually rising, suggested analysts at Jefferies in a recent note, as oil prices that are close to the $100 a barrel (Brent) mark continue to climb ahead of a busy election calendar.

The sharp rally in the equity markets in the last few months, they added, have made valuations expensive. As a result, Jefferies expects the Indian markets to remain choppy in the near-term.

“Nifty above 20,000 with one-year forward price-earnings (PE) of 19.3x at +1 standard deviation and 12 per cent above 10-year average; our preferred yield-gap parameter (10-yr bond yields less 1/Nifty PE), at 200 basis points (bps) is +58bps since March lows and +69 bps above average, pointing towards valuation discomfort,” wrote Mahesh Nandurkar, managing director (MD) at Jefferies, in co-authored note with Abhinav Sinha and Nishant Poddar.

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As a stock strategy, they have shifted consumer staples to underweight, and moved weight (bought into) to Bharti Airtel in their model portfolio.

“We would buy the dips, as the medium-term appears bright with the ongoing capex cycle recovery,” Nandurkar said.

Oil on a boil

Rising oil prices coupled with a busy election calendar in the months ahead, the Jefferies note said, is likely to exert pressure on the fiscal situation. From around $83 a barrel on August 21, oil prices have surged nearly 14.5 per cent as Russia and Saudi Arabia cut production.

“With Brent crude oil price above $90 a barrel, the headroom for a fuel price cut around Diwali (Q4-CY23 festive season) is gone. Reverse may happen though with Diesel prices already, implying losses for public sector oil companies. Rising oil prices have adverse implications for the rupee as well, with every $10 per barrel swing implying 0.4 percentage point (ppt) change in the current account deficit (CAD),” Nandurkar wrote.

The political calendar will get busy in the next few months as five states Madhya Pradesh (MP), Rajasthan, Chhattisgarh, Telangana and Manipur go to polls, which experts suggest will be seen as an indicator of BJP's performance in 2024. In 2018, the BJP lost power in the three states of MP, Rajasthan and Chhattisgarh to the Congress and the results came as a negative surprise.

Meanwhile, the heavy election calendar will, Jefferies said, is likely exert pressure on the government for increasing social spending with schemes to boost annual transfers to farmers, expanding health insurance, interest subsidy on home loans etc. possible. State freebies, they said, have already started in a big way. A sharp rally in the PSU stocks, Nandurkar believes, raises the chances of the government pushing for divestment in some companies.

“Senior government ministers and bureaucrats suggest that the Bharatiya Janata Party (BJP) government is likely to further build on the G20 momentum, with this week's new Parliament inauguration a part of the mega projects completed under Modi-2 government. We also sense that up-fronting the national elections to December 2023 (currently April 2024 schedule) is unlikely, partly on weather (winter in Hill states) and partly as Ram Temple opening in Jan24 will be awaited," Nandurkar said.

That said, markets, a Jefferies note suggested in August, are attaching a 70 per cent probability of Prime Minister Narendra Modi-led BJP government returning to power in the Lok Sabha elections next year. From a long-term perspective, such a scenario bodes well for property and capex-related plays, including cement, infrastructure, capital goods, and large banks and small-and midcaps (SMID), it said.