Maiden Over! India Strategy July, 2019


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It was another major event of the year, “The Final Union budget” for FY 2019-20 and it was presented against the backdrop of slowing economic growth, limited fiscal space, decelerating discretionary consumption, slackness in private capex and global headwinds.

Keeping these constraints in mind, the budget has stayed put on its path to Fiscal Prudence giving priority to macro stability over reviving the dwindling economic growth which was the need of the hour. Further, the Budget has not left a stone unturned for imposing taxes or surcharges wherever it could. This will have a significant impact on the way people may evaluate or may even reconsider their financial and investment decisions. The Maiden Budget from the first full-time woman Finance Minister of India has been a surprise in many ways for the Investor community.

Globally, Geopolitical tension between the US and Iran and concerns over US-China trade talks and employment data from US turning unfavorable were some of the factors that weighed on the sentiment. ECB had also pushed back rate hike and expects to keep key ECB interest rates at their present levels due to economic sluggishness. US Fed also left the interest rates unchanged and signaled a possibility for rate cuts to support growth amid growing uncertainties. With European countries long term yields entering negative zone and the rising concerns over global economic slowdown or recession have increased the possibility of a sell-off in global equities.

On the local front, the Union budget has been neutral to negative for equity markets. The budget proposed increasing minimum public shareholding in listed companies from the current threshold of 25% to 35% and relaxing the minimum threshold requirement of 51% Government ownership for a PSU by including stake of Government controlled entities. Both these measures, when implemented, have the potential to increase the supply of equities in the market. The market may be concerned about the overhang of impending supply and consequently, the equity market reacted to it negatively.

Adding to it, current valuations are expensive and there appears limited scope for re-rating. The revival in economic growth is likely to be gradual, given limited policy levers. This leaves markets vulnerable to volatility in near term. However, whenever the relative valuations of Mid & Small Caps vis-a-vis Large Caps have touched the bottom extreme, the journey ahead has resulted into positive returns over the long term. With the earnings set to gain pace, any further correction will present buying opportunities in the Mid & Small Cap space which have faced a harsh price & time correction. Any exposure towards equities should be in a staggered manner and for mutual funds via SIP/STP route.

On the fixed income front, the yields on the longer end may remain relatively less volatile as the bond markets cheered the initiative of overseas borrowing, albeit ambiguous, this will lower the supply pressure on the domestic front. This leaves very less room for any duration play in future. On the credit opportunities space, the 6-month partial guarantee, increased supervision by the regulator and the ability of PSU banks to purchase pool assets from NBFC & HFC could be a game changer, however, the proper implementation of the expected processes will guide the future spread premiums. Till then, any exposure should be taken through short term to medium term debt funds with a high-quality portfolio.

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