From an economic viewpoint we like the Budget. Capex has remained as per interim Budget with the RBI dividend being wisely utilised to support expenditure in Andhra Pradesh, Bihar and other eastern States whilst still being fiscally prudent.

Indeed, the fiscal deficit has been reduced from 5.1 per cent to 4.9 per cent of GDP. The focus on job creation/ skill training is commendable and is the key highlight for a sustained long-term economic growth. The expenditure towards rural economy is also a welcome move and will result in a continued growth multiplier effect for the economy. The event is expected to benefit consumption stocks. 

Investors hit

The main area for concern for the market is the increase in LGT/SGT/STT which could hit popular retail trading stocks, especially PSU stocks. We think the increase in LGT will be absorbed but will monitor and see if the trading/speculative element of the market is dampened. Regulatory action from SEBI regarding options trading may be expected in the coming days. 

There was no relief for the banks in terms of moving investors towards deposits and as a result, banks NIM’s will remain under pressure. The main hope now is for monetary easing by the Reserve Bank of India  but this is unlikely to happen until the Federal Reserve moves first, expectations for which are either September or November of this calendar year.  

In conclusion, the macroeconomic outlook appears promising. However, market participants and investors should remain mindful of potential changes in the direction of capital gains tax in the future. As the dust settles in the next few days and we get back to fundamentals, the earnings season will be back in focus. So far, the first quarter earnings are proving disappointing with earnings being revised downwards along with share price targets and we do not expect this trend to reverse.

Therefore, given the current high valuations and 10 per cent rise in the market since April, we see no catalyst to push markets higher in the short term and believe the risk to the downside is higher, albeit it may be gradual. It is anticipated that significant sector rotation will occur in the upcoming period, with defensive sectors such as FMCG and IT expected to lead the gains.

Meanwhile, banks, mid and small-cap sectors may face pressure.  

Our view remains that the index will rise in line with earnings growth (+15 per cent) and therefore see limited upside given the strong returns year-to-date. We continue to favour themes like electronics manufacturing, premiumisation in the beverage sector, defence, power (wind power) and hotels. 

The writer is CEO, Avendus Capital Public Markets Alternate Strategies LLP

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