“Growth-oriented” Budget gets thumbs up from Brokerages

Global brokerages are largely bullish on equity markets post Budget announcements. However, they see upward pressure on the bond markets due to a more “supply focused” Budget. 

Focus on Bank, infra, commodity stocks: CLSA

CLSA termed it a “growth-oriented budget,” however, the focus remains supply-side over demand.”

“The 2022 Budget highlighted the government’s growth focus primarily through an investment and capex push without getting bogged down by higher-than-expected FY22/23 fiscal deficit target of 6.9 per cent /6.4 per cent of GDP. This makes us raise our March 23 forecast for the 10-year yield to 7.5 per cent from 7.25 per cent,” it said in a note. 

“Another flip side of this singular investment focus is the consumption side was left wanting. Higher yields and lack of demand focus may further reduce the attractiveness of equities vs bonds and may accelerate sector rotation from more expensive consumption and IT space to the investment-focused and less expensive banks, infra and commodities,” it added. 

According to CLSA, while the focus on capex was positive, higher interest rates were negative. 

Lack of trigger for consumption: MorningStar

MorningStar, a global investment advisory firm and MF tracker, said, the government’s capex push should also help to “crowd-in” private capex which is lagging. 

“However, measures to boost private consumption are limited. Personal income tax-related measures such as tax cuts, hike in the standard deduction, and higher MGNREGA spending would have made an immediate positive impact on consumption,” it said. 

Further, the additional PLI outlay for food processing, solar, telecom & networking products and large-scale electronics and IT hardware will help promote domestic manufacturing and improve export attractiveness, it said. The extension of ECLGS is another positive for MSMEs.

Equity markets have been reacting positively to the Budget, especially sectors such as capital goods, steel, cement and healthcare that are expected to gain from the Budget measures, it further said.

 “Thrust on capital expenditure led by government, improving export attractiveness, low cost of credit, expectations of increased consumer spending, and housing market recovery with improving affordability levels are expected to support high corporate earnings growth (20 per cent - 24 per cent) expectations for FY2022-24.”

“Much of this would be dependent on the revival of private consumption which continues to remain sluggish,” it added. 

Echoing the sentiments regarding the bond market, it said, “In the near term, the 10-year benchmark G-sec yield may continue to trade at elevated levels in absence of any intervention by RBI.”

Thrust on Infra creation: Goldman Sachs

Goldman Sachs said, “The thrust of the government’s policies lies on infrastructure creation, and reviving the rural economy. To encourage exports, the government proposed to replace the existing law governing special economic zones with new legislation to enable States to become partners in the hubs.”

It also highlighted the higher-than-expected net market borrowing in FY23 as budgeted. “This, along with borrowings by States, means that the combined issuance for the Centre and States is likely to remain elevated. With elevated supply and comparatively lower incremental demand from natural buyers, we estimate that the RBI will have to continue to support government bond purchases in FY23, despite domestic liquidity constraints,” it said, outlining its bearish outlook for INR longer-dated rates in the medium term.

Heavy lifting by Capex: Julius Baer

Julius Baer, lauding the growth-inducing Budget said that it “does the heavy lifting by sharply increasing capital expenditure.”

“As a relief, despite the State elections ahead, the Budget did not have any big populist measures, which had some sections of the markets worried. Encouragingly, like last year, the Budget estimates are realistic, believable and transparent,” it said in a note. 

“While there is a bit of disappointment that there is no direct stimulus to spur consumption and no major announcement around privatisation, the focus on boosting manufacturing as well as an underlined emphasis on areas such as start-ups, modern mobility and clean energy, shows that the FM has prioritised long-term growth,” it said. 

Global cues, earnings to drive markets

According to the report, the stock market is likely to now shift its focus on Q3FY22 earnings and global cues with the Budget being announced. 

“Now that the big local event – the Union Buget is over, the focus will shift back to the quarterly earnings that have been very robust, and we believe that Nifty is on track to deliver 30 per cent plus earnings growth for FY22. Apart from global cues, the market participants will closely watch the election result in the key State of Uttar Pradesh, which is going to the polls in February,” it said. 

It expects over 22 per cent EPS CAGR over FY21-24. “The Union Budget has only strengthened our conviction, given the focus on revival of the capex cycle. We maintain our constructive view on the equity markets and India continues to remain a ‘Buy the dips’ market rather than a ‘Sell the rallies’ market. In the near term, we expect large caps to outperform the mid and small caps,” it said. 

Talking about the bond markets, it said, “The expansionary budget largely funded by an increase in the government borrowings, amidst global and domestic inflationary environment, is a headwind for the bond markets. Additionally, absence of clarity on the inclusion of Indian bonds in the global bond indices has further dampened the bond market sentiment.”

WIll miss fiscal target: BoFA Global

According to BoFA Global Research, the government is likely to miss the FY22 fiscal deficit target by 10bp (6.9 per cent of GDP, FY22 RE), but the target for FY23 fiscal deficit was also pegged at a relatively high 6.4 per cent of GDP. 

“The difference was largely on account of a massive capex push and divestment estimates. This underlines the government’s resolve to aid a virtuous cycle of investment with public capex taking the lead and crowding in private investment,” it said. 

“We see the provision actuals (to be released on 31st May) to be at least in line with BE, depending on the timelines of LIC IPO execution and our FY22 nominal GDP growth estimate of 15 per cent y-o-y. We suspect the govt. won’t be able to undertake ₹12.5 trillion of additional spending in 4QFY22, given the current run rate and thus, expect a lower fiscal deficit outcome,” it said. 

It further expects the government to over-deliver on the FY23 fiscal deficit target, pegging it at 6 per cent of GDP. 

“Two key factors explain this, we estimate FY23 divestment proceeds at ₹1.65 trillion vs budgeted ₹650 billion, given the robust pipeline. Secondly, we expect the total capex to be lower by ₹1 trillion vs the budgeted ₹7.5 trillion in FY23, with constraints to spending capacity coming into play. Lastly, we see direct tax revenue growth to come in lower than budgeted, but that is likely to get more than offset by higher divestments and lower capex,” it explained. 

‘The Big Miss’

Talking about the reform measures announced in the Budget, it said that the reform agenda was on point, however, bond index inclusion was a big miss.

“Amidst all the encouraging news, the budget was silent on any tax tweak to enable the inclusion of India bonds on global indices, which was keenly awaited. This disappointed the bond markets as they reeled under the pressure of higher-than-expected borrowings,” it said.

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