Budget measures cheer investors as markets make a V-shape recovery
- The Indian markets staged a smart V-shaped recovery after a sharp 7.6% correction.
- The correction was on account of weak global investor sentiment, FII outflows, Covid related issues and a general perception of higher taxes in the budget announcement.
- The budget did not include additional taxes, while it focused on growth and privatisation of government assets.
- FII flows have subsequently returned, and the markets rebounded sharply.
- Several sectors gained from the budget announcement. The primary beneficiaries include the financials, automotive and real estate sectors.
The Indian stock markets scaled lifetime highs in January. Over the same horizon, the markets have seen high volatility, especially just before the budget announcement. The recent recovery in the benchmark stock indices was as sharp as the decline. The benchmark Nifty Index fell from all-time highs of 14,753 on 21st January 2021 to 13,626, slumping almost 7.6% in just six trading sessions. The decline followed a 30% vertical rise in the Index from October 2020, so it was only fair to expect a pullback after the sharp rally.
Here are some of the factors that contributed to the slide in the Indian markets-
- Negative investor sentiment in the US markets- Investors in the US paused as the controversy surrounding Gamestop continued to roil the markets. Additionally, investors who cheered the $1.9T stimulus package announcement preferred a wait and watch approach as the stimulus package is yet to pass through a divided Senate.
- Covid related factors in global markets- In other parts of the world, new lockdowns brought on by the more contagious variants of Coronavirus and slow vaccination drives dampened business sentiment.
- FII Outflow- Negative global sentiment was also evident in the FII (Foreign Institutional Investor) numbers. FIIs sold more than Rs 12,000 cr worth of equities in just five trading sessions, from 22nd -29th January. Likewise, on the domestic front,
- Investors continued to pull out money due to a profit booking as markets scaled lifetime highs and
- A conservative budget outlook. The market sentiment was that the Government would increase corporate and retail tax in the form of a Covid cess. Domestic investors pulled out money for 17 straight trading sessions, from 4th January- 27th January 2021.
However, the budget announcements changed all expectations, cheering foreign investors who bought equities worth Rs 10,000cr in just three trading sessions in February, leading to a V-shaped recovery. The budget was mostly reformist and growth-focused, with no additional taxes on corporates and individuals. The Government expects higher tax buoyancy-driven by higher growth in the market as companies start investing in CAPEX.
Here are some of the primary aspects of the budget that cheered markets-
- A significant thrust towards privatisation with the announcement that PGCIL, NHAI and the other PSUs would add assets worth Rs 12,000 cr into the InVits Trust.
- Large landholdings with PSUs to be monetised
- The privitisation of two PSU banks and one general insurer, besides listing LIC (Life Corporation of India) on the stock markets.
- Raise foreign direct investment (FDI) into the insurance sector to 74%.
- Consolidate most financial regulators under one code for legal simplicity and consistency.
- Simplify taxation by reducing the period to re-open tax assessment to three years.
- Setting up of a government-owned asset reconstruction company to buy bad debt from PSU banks and allow them to re-start lending in a big way
- Push to the real estate sector with an additional deduction of Rs 1.5 lakh allowed on home loans. Additionally, affordable housing projects can avail of another tax holiday year.
- Capital gain exemption for investment in startups extended for another year.
- Significant benefits to sovereign wealth funds to deploy vast sums of money in the Indian capital markets. These funds can now claim exemption from dividend interest and capital gains, making India more attractive to overseas capital.
- Increased allocation to the healthcare sector by 137% and creating a more robust health infrastructure in 5-6 years.
- The Government announced a vehicle scrappage policy that incentivises vehicle owners to scrap vehicles after 15 years (commercial) and 20 years (private cars).
Several sectors have come out winners and have seen a surge in investor interest in the days following the budget announcements
- Financials- The privatisation of the two PSU banks is a landmark decision that shows the Government's thought to bring more efficiency to the banking sector. Setting up a government-owned asset reconstruction company to unclog the balance sheet of public sector banks would allow the industry to start lending again and move on from the NPA crisis that hit the sector over the past five years. Banks, especially the PSU's, are big beneficiaries of this step. The Nifty PSU Index spiked following the announcement. Given that the Index has underperformed the broader Nifty by more than 30% the last year, a reversion to mean is a definite possibility.
- Automotive companies- Passenger and commercial vehicle manufacturers like Tata Motors and Eicher Motors could benefit from higher vehicle sales due to the scrappage policy. The Government would incentivise vehicle owners to junk their old vehicles and buy new ones by providing them with cash subsidies on the new vehicle or rebating on the registration and road tax. Vehicle financing companies like Cholamandalam Finance and Shriram Transport Finance should benefit.
- Real-estate- The real-estate sector, too, realised its positives from the budget in the form of affordable housing, a higher deduction of loan interest and debt financing of InVITs and REITs. Real estate stocks such as Kolte Patil, Sobha developers and lenders such as LIC Housing Finance could gain from investments into the real estate space.
Mid-way through February, India's primary Index, the Nifty, was up about 10% for the month, rebounding sharply from the 2.5% losses from the previous month. While a mix of low expectations in the quality of reforms and higher tax outlook contributed to the jump, the fundamental factors would eventually catch up even as the Nifty scales 15k.
On charts, Nifty tested the long-term bullish channel's resistance at around 15200 and could see some profit booking around these levels. The depth of the correction would depend on how the global markets perform in the days ahead. With new variants of Coronavirus on the rise, it could be a while before global economies return to normal. So, although the trend remains bullish for now, with the buy on dip strategy still in place, watch out for negative triggers and scale back on positions if the Index slips below key long-term supports.
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