Decoding the Union Budget 2022-23 and its impact on your investments

What are the hits and misses of the Union Budget 2022-23? 

What is the impact on asset outlook for equity, debt and gold? 

These were the focus of the Quantum webinar - ‘Decoding the budget and its impact on your investments where the CIO of Quantum Advisors Arvind Chari and Quantum fund managers Nilesh Shetty, Chirag Mehta shared invaluable insights held recently.

Says Arvind Chari, CIO, Quantum Advisors, This budget continued its focus on prioritising growth over debt and deficits.“Last year’s Union Budget 2021-22 was the first effort made by the Government in shedding its fiscal conservatism and keeping the fiscal deficit higher as a percentage to GDP compared to historical trends. 

 The Government this year has announced a significant increase in CAPEX spending, which will drive growth over the long term and help sustain this economic revival.

We maintain our stance that India is on the cusp of economic recovery due to certain tailwinds as detailed: 

1.       Government focus on reviving growth with higher spending

2.       Improvement in India Inc balance sheets with lower debt and higher profits

3.       Banks have lower NPAs and higher capital adequacy

4.       Indian exports have surged on the back Global growth, which can spur corporate capex activity

5.       Residential real estate activity, which has a large multiplier, is witnessing a positive turnaround

6.       Availability of capital flows  across FDI, FPI, Private equity and venture capital, real estate and infrastructure as global investors allocate away from China

It has maintained the status quo, and there was a clear priority given to growth over controlling the fiscal deficit. 

So, if the Government can spend this capital expenditure, efficiently, over a period of time, then this growth momentum that we are seeing should be able to sustain.”

Adds Arvind, “One of the disappointments that we have had from this government is the lack of steps to boost income and support consumption.We would have loved to see some balance between boosting industry and supporting individuals. Think of the sacrifices the Indian consumer has made over the last 2 years. Lost livelihoods, lower incomes, health costs, higher oil and food prices, higher taxes on income and GST. The governments response in terms of some continued income support or a lower tax burden has been missing.”

Regarding interest rate hike, Arvind said, “We believe that since the Government is now focusing on growth, the RBI should now focus on inflation. Priority for the RBI hould shift from supporting growth to supporting inflation. Which would mean that RBI would need to remove liquidity and follow it through withinterest rate hikes. That means short term rates will go up. The best way to play an increase in interest rates is what we believe is through  liquid fund scheme. So, if you look at the previous cycle that is 2010-12, as the rates in the market increased, the yield on our liquid fund portfolio also went up because generally liquid funds have very short maturities, and they have very low mark-to-market risks. As the rates increase, it keeps repricing and reinvesting in higher and higher-yielding assets. So, when interest rates are likely to go up; instead of keeping your money in a savings account, where the interest rate is not going to move, in a rate hiking cycle, if you move that money or the chunk of that money into a liquid fund, your investment could potentially grow. Rate hikes are good for investors building their emergency corpus. Liquid fund investments for emergency purposes will grow as rates go up provided that these liquid funds do not take any credit risks.”

Says Nilesh Shetty, Fund Manager, Equity, “The surge in CAPEX and surge in Government spending is perhaps the biggest takeaway in the budget. You should expect a pickup in the corporate CAPEX cycle in the next 18 months, and you should expect cyclicals should thrive. The concerns from this budget are that we have cut spending on rural India, causing a near-term impact on dependent Agri and ancillary industries. The SMEs (Small and medium enterprises) are at the brunt of the Covid cycle. That does not bode well for employment in general, but you expect formalization to continue to accelerate, and large players become larger. Again, as pointed out, inflation is perhaps a big risk, but if it goes out of hand, you should expect some cutback on consumer discretionary spending. But barring that, we believe that India is at the cusp of a multi-year upcycle and there are strong tailwinds that are emerging for India that led us to believe that the corporate numbers will continue to surprise us on the upside. Real estate revival and increased hiring in information technology will create very strong multipliers for the economy and will act as strong catalysts to pull up GDP growth back to the long-term average. Post Q1 FY2021, where analysts had initially cut their numbers sharply have started upgrading their numbers, that trend is continuing. We expect this trend to continue over the next 3-4 years. We believe India will again continue that upcycle, especially for cyclicals as you have a broad-based economic recovery. In terms of how we are positioning the portfolio, we have very large weights in sectors in which we think it will benefit from a very broad-based economic recovery such as consumer discretionary, financials, materials and utilities, etc. These are the sectors where we think valuations are still reasonable and will do well over the next few years. Not only is the portfolio positioned for economic revival, but we are also careful in picking and choosing companies that can handle interest rate volatility a lot better. People who are looking to play the India growth story can look at value funds.” 

The green economy or the socially conscious economy is another area also growing significantly and there is a global push towards ESG investing. This budget spoke about sustainability many times. One of the primary initiatives, the PM Gati Masterplan is also powered by clean technology. There has been a thrust towards a green economy. There were several positives in terms of sustainability, such as a single window for all green clearances, which means less bureaucracy. There is a thrust on clean and sustainable mobility. The battery swapping policy is a big positive and it could give a big push to EV if it is formulated well. Another positive is the PLI given to solar manufacturers, which will help reduce dependence on imports and allow the solar energy sector to go up significantly. There is a push towards a circular economy that means more regulatory push towards recycling initiatives and transitioning towards a carbon-neutral economy. The Government will additionally be issuing green bonds, which will help meet the financing needs for achieving the climate goals. Although, there was a thrust on sustainability, it seems short on allocations. The flip side of it will be that Indian companies will have to be ready for the regulatory push towards sustainility over the coming years, said Chirag Mehta, Sr. Fund Manager, Alternative Investments.

Regarding Gold, Chirag said,” There was no reduction in customs duty. Today the differential between Indian international gold prices is above 14%, which primarily includes the customs duty and the GST. Although there is no change in budget that can impact gold tariffs, the CAPEX push could have an inflationary impact and during such times, Gold might do well.”

Regarding Crypto tax, Chirag said, “While Crypto is being compared to Gold, it lacks intrinsic value. Crypto will be taxed at 30% plus TDS of 1%. Thus, the speculative gains being taxed will discosurage holders and drive them to the much deserved Gold which is still one of the best diversifiers for your portfolio. So always have up to 15-20% allocation to Gold. Currently, Gold is currently  consolidation its gains, after correcting from about Rs.55,000 rupees per 10 g, is now consolidating in a range of Rs.45-50,000. Such periods of consolidation are good times to accumulate Gold and build gold allocation in your portfolio.”

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The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. 

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