By Anirudha Taparia
Finance Minister
Nirmala Sitharaman treaded a fine path by balancing all aspects in the Union Budget. Expectations prior to the Budget were very high. The need for big-bang stimulus to address the economic slowdown was much sought, and on that front, the Budget seemed to be have disappointed a bit.
We believe the long-term measures taken by the government in several fields are likely to start showing results in the next couple of years.
Equity: Dips will be opportunities
Long-term returns in Equity is dependent on earnings growth. Unfortunately, earnings growth has been lacklustre in the past few years. As a result, valuations based on historical P/E multiples continue to appear on the higher side on the back of depressed earnings.
Valuations based on both forward P/E and P/B basis look slightly more reasonable and are close to the long-term averages. We continue to maintain our slightly underweight stance on equity post the Budget. Any dips would be a good opportunity to add to long-term portfolios. Midcap valuations look fair at the moment and investors can look to allocate money to expert stock pickers who can identify fundamentally strong companies currently trading at cheaper valuations in this space.
Fixed Income: Stay with high-rated bonds
The market is likely to be pleased with this Budget. The government loosened its fiscal deficit target and taken deviation of 0.5 per cent consistent as per the FRBM act. The fact that the government restrained from any major populist measure is a major positive for the
debt market. The government’s nominal growth estimates of 10% also appears to be quite reasonable.
Also, the government’s plan to deepen the bond market by increasing FPIs limit in corporate bonds to 15 per cent from 9 per cent shall boost overall liquidity in the fixed income market. Certain specified categories of government securities would also be fully opened for non-resident investors.
These steps are likely to assist in developing a deep and liquid bond market. Given the slowdown in the economy and lack of liquidity available to lower rated corporates at this juncture, we would avoid investing in high credit risk instruments. We continue to recommend investing in funds with high quality credit with short-medium maturity.
Also, tactically, we prefer investing in long term rolldown funds given the attractive term spread. We can also look to tactically invest in well-structured credit market opportunities with liquid collaterals in place.
Here’s a look at the Hits and Misses:
Hits
The Budget provided a relief for the lower- and middle-income groups. For individuals earning less than Rs 15 Lakh, tax burden is likely to come down, which can boost consumption.
The government will grant 100% exemption for sovereign wealth funds in infrastructure and other notified sectors with a minimum of lock-in of three years. Given that several large wealth funds were looking to invest in India, this decision is likely to give a major impetus to the infrastructure sector.
The FM announced the abolition of dividend distribution tax and would be now taxed in the hand of the investors instead of the firm. This is likely to encourage companies to pay higher dividends and encourage investments.
Despite pressure from several corners, the government continued to stick to the FRBM’s fiscal deficit goals only utilizing 0.5% deviation available under the escape clause.
Misses
- The Budget failed to provide any immediate relief to the real estate sector, which has been in trouble for quite some time now. A major worry for most developers has been the lack of liquidity in the sector and the budget did not provide any relief for the same. There was no announcement either to kickstart any demand for real estate (apart from the exemption extension for another year in the affordable housing category).
- There was no clear roadmap for the Rs 2.1 lakh crore disinvestment target that the government has proposed for FY21. The overall target of Rs 2.1 lakh crore also seems slightly difficult to achieve (despite including LIC) given that the government failed to achieve even half its amount in the current financial year.
- The Budget did not make any mention of land and labour reforms which has been long overdue.
- Given that the need of the hour was to revive demand, the Budget failed to take any focused measures for the same.
- By introducing a new tax regime and allowing individuals to choose between the old and the new tax regime (without exemptions), the overall structure has become slightly complicated with a person not familiar with taxation finding it difficult to go through all sections.
- The market expected more liquidity support for the NBFCs, which was missing in the Budget.
- Given that the dividend will now be taxed in the hands of shareholders, individuals in the highest tax bracket would now have to pay a tax of 43%.
(Taparia is Executive Director, IIFL Wealth and Asset Management. Views are his own)