Markets gave a thumbs-down to the Budget 2020 proposals and logged their worst Budget-day fall since 2009 with the S&P BSE Sensex closing nearly 1,000 points lower. Some of the key issues such as the lack of measures in the Budget to kick-start economic growth, possibility of a higher fiscal slippage in the next financial year, a stiff divestment target to bridge the revenue shortfall, lack of relief on the long-term capital gains tax (LTCG) among others, have left unaddressed and disappointed the market .
Most experts have now turned cautious on the road ahead for the stock market – at least in the short-to-medium term – as they expect the economy to slow even further, thereby impacting the corporate earnings amid rich valuations and negative global cues. This, they feel, could keep markets range-bound and volatile.
Analysts at Nomura, for instance, see the gross domestic product (GDP) growth to slow further to 4.3 per cent in Q4-2019 from 4.5 per cent in Q3, and see a below-trend growth of 5.7 per cent in financial year 2020-21 (FY21) from 4.7 per cent in FY20.
“We see the budget as largely neutral for growth and inflation. A prolonged deleveraging cycle and a clogged financial sector mean that any growth recovery from the current downturn will take much longer. We also expect the RBI to leave policy rates unchanged and retain its accommodative stance in the upcoming policy review on February 6,” wrote Sonal Varma, managing director and chief India economist at Nomura in a post Budget note.
Those at Kotak Securities see the quality of incremental earnings in FY21 as ‘quite poor’ as 74 per cent of the incremental earnings come from banks oil, gas & consumable fuels and metals & mining sectors. They do not see a material impact of the Budget proposals on either consumption or investment demand.
“The strong earnings growth in these sectors primarily reflects a low base in FY20 for banks and telecom companies and global economic recovery in FY2021, which may disappoint if the coronavirus issue worsens over the next few weeks and transforms into a global epidemic,” said analysts at Kotak Institutional Equities led by Sanjeev Prasad, their managing director and co-head for institutional equities.
Global cues back in focus
With the Budget out of the way, Andrew Holland chief executive officer at Avendus Capital Strategies expects the markets to now start focusing on global factors amid a slowing economy back home.
“Come Monday, investors will start looking at the global markets and updates on coronavirus’ impact. As regards foreign investors, they will now look at India in context of the global developments. There is nothing for them as regards the Indian economy to get excited about post these Budget proposals. Any changes of revival in the mid-and small-caps will also get delayed. Large companies in each sector will continue to gain market share in a slowing economy,” Holland says.
Foreign investors pumped in over Rs 12,000 crore in stock markets in January and have remained net buyers of Indian equities for the fifth consecutive. In the equities segment, FPIs invested Rs 7,547.8 crore in September, Rs 12,367.9 crore in October, Rs 25,230.6 crore in November and Rs 7,338.4 crore in December, data shows.
“After the initial reaction, expect investor focus to shift back on earnings and global cues. In the absence of a significant growth boost in the Budget and given the cautious global environment owing to the spread of Coronavirus, market should stay volatile in the near-term,” says Navneet Munot, executive director and chief investment officer at SBI Mutual Fund.