Domestic market will move as per global & pre-state election trend

The budget is good, in-line with the reforms happening in the last 2-3yrs. However, not provided anything additional for the domestic economy & market to look upon. Undoubtedly, long-term capex is the focus with no negatives like fiddling with taxation & populist measures.

It has no concerns over the high fiscal deficit, the average fiscal deficit for the last 3yrs will be above 7% with 6.4% as the target for FY23. The target could be in the context of strong forex, consistent uptrend in the domestic economy, and need of the hour to push government spending when world economy & private expenditure is expected to slow.

Government is ready to borrow from the market & spend on revenue & capital expenditure to develop future infrastructures. Sectors like capital goods, power, EPC construction, industrial & manufacturing are the winners from the stock market point of view. 

Domestic yield to see a rapid rise

On a near-term basis, we needed some balance in the budget with supportive policy to common man & industries, which are heavily impacted by pandemic. Direct & indirect support to the rural market is also moderated. No tax benefits to low taxpayers in such an inflationary economy is also a point of concern.

High deficit & govt expenditure will require high borrowings. The huge govt financing will affect the bond & equity market in the medium-term. Hope that the deficit funding has considered the context of slowing world economy and changes having in the fiscal & monetary policy.

Interest rates have started to rise & will extrapolate in the future, high inflation & crowding out effect will lead to a rapid rise in domestic yield.

A couple of days before the budget, the market started trading well in anticipation of a positive budget. On the budget day the market gave a thump-up to the growth-oriented & no negative surprise budget. This trend extended by a day supported by positive global market.

However, we should note that the budget has left keeping the market & economy intact, without providing any additional inspirations.

Henceforth, the domestic market will move in-line with the trend of global market, which has become mixed due to geopolitical issues, rising interest rates & high inflation. Domestically, the market will also have to consider the ongoing Q3 results and state election to be concluded in the next 1-2 months.

World central banks have decided to take on with the consistently high inflation, which was presumed to be transitory. The Bank of England has back-to-back raised interest rates to 0.5%. The US Federal Reserve is expected to increase interest rates by 75bps to 100bps in 2022, starting from next meet. The world equity market is getting volatile, NASDAQ index has lost about 11% in the last one month.

Q3 results till date are broadly in-line with expectations. Again, no positive surprises for the market to constantly maintain its upside. Sector-wise banks have done marginally better than forecasted with improvement in asset quality & drop in slippage.

To outperform in this challenging period of high valuations & developments happening in the global market, investors need to focus on pockets which are theme of the future, value buy & hold a balanced portfolio.

(The article is written by Vinod Nair, Head of Geojit Financial Services. Views are personal).