POST BUDGET MARKET OUTLOOK- Its all about the cost of capital

The Budget has come and gone and a yearly ritual which should normally be a non event is usually made into a big event where forecasts are made into the future based on what a particular speech says. The economy and stock markets normally do not work that way. I will be brief in my analysis as a lot has been written in the papers and discussed on TV Already.

Lets first cover the negatives. The only big negative that I could see was the introduction of the “Robin Hood” tax on people who are apparently “Super Rich”. As the Indian Economy grows a Rs 2 Crore income does not really make anyone Superrich as in most large cities in India, especially Metros a decent house (not premium) costs anywhere between Rs 2-5 Crores. The socialist bent of the government in some aspects is bothersome as it can make them take decisions that lead to slower growth for longer. The other negative was increase in custom duties and fuel excise and cess which could have ideally been postponed to later in the year when economic growth would have taken a better hold. Besides this I could not see negatives in the budget.

On the other hand there were several positives. A lot of commentary I have heard and read talks about the lack of Fiscal Stimulus. However in my view it was tough to do much on that front especially after the government had already committed to put around Rs 90000 Cr into the bank account of farmers which is actually a decent fiscal stimulus as anything provided to the bottom of the pyramid typically entirely gets spent.

The bank recapitalization amount of Rs 70000 Crores is also quite positive as unlike the previous few years this amount will go entirely into enhancing credit growth as most of the big writeoffs have already been taken. The other move to provide liquidity to NBFCs with the Government willing to take some of the losses if they happen is also a very good move. This was immediately backed up by the RBI announcing liquidity measures which would provide banks with significant liquidity to process the refinance. I think we will see fast moves on this front. Improved liquidity and reduced interest rates will be positive for economic growth.

The other big positive was the announcement of Sovereign Bond Issue which I have been advocating for several years now. This immediately reduces the “Crowding Out” risk for private investments from the markets. Just to understand a $ 10 billion bond issue reduces market borrowings by Rs 68000 Crores and the ideal issue size of $ 20 billion will reduce market borrowings by Rs 136000 Crores and will be a huge fillip to economic growth. The only thing is that the government needs to take a foreign exchange risk which is fine till around $ 100 billion of borrowings. This is a significant positive which most people are not recognizing at this stage. Net interest payouts of the government will also remain low as average borrowing costs will come down.

10 year bond yields have come below 6.7%, they were 8.2% 9 months back. It is a significant reduction in risk free rate. As liquidity improves we will see market rates also come down going forward. On top of that we should see another rate cut by the RBI going forward. Economic growth is all about the cost of capital if other risks are not there. The government will obviously be working on various fronts for economic growth and lower interest rates will add to that growth. Most people will not recognize this at this stage but wait for 3 months and see how the economy will start reacting positively.

Overall the global outlook for equities and Emerging Markets is positive and this budget has done nothing to change the long term outlook. Both economic growth and stock markets will do well going forward. My view is that we will see a 8-10% rally in the Nifty/Sensex in the second half of 2019 and a 12-15% rally in Mid Caps.

Leave a Reply

Your email address will not be published. Required fields are marked *