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Budget Review and Investment Outlook, Feb 2018

Union Budget Review and Investment Strategy

Executive summary of Union Budget Review and Investment Strategy

  • The Budget for FY2018-19 was presented amidst certain market apprehensions – will it play the populist card ahead of elections, will fiscal consolidation roadmap be followed, will there be some kind of tax on long term capital gains, will it tax the affluent more to fund giveaways, will some kind of Basic Income formula be introduced in addition to current welfare programmes and so on.
  • The budget did provide a few surprises, but it addresses two critical segments of the economy – Agri & Rural economy (which has been under severe stress) and Infrastructure.
  • Fiscal slippages in FY18 did surprise the markets but can be largely attributed to shortfalls in GST collections. It implies that the government would have to walk a tight rope in FY19. It is heartening to note that the Government is committed to lower India's public debt to GDP to 60%.
  • Introduction of taxes on long term capital gains on equities has been a big sentiment dampener and may have caused some initial confusion leading to a sell off the day after budget. The impact may be visible in near term but is expected to stabilize in due course.

From investor perspective, we draw following inferences:

  • Equities: Market performance over the next few months will depend on the interplay between macro stability and an improving earnings outlook coupled with continued improvement in global growth prospects. The global economic cycle, which is maturing and exhibiting classic late cycle signals, may be a more significant driver of future market performance than the impact of budget. Valuations show stretch and thereby leaving very little scope for disappointment in earnings

    We expect rewards for taking risk to be gradually deteriorating. It is therefore important to highlight that over-optimism and investor exuberance may be challenged in 2018 and need for asset allocation discipline & rebalancing has never been stronger.
  • Fixed Income: While increase in yields has priced in at least two rate hikes, RBI being hawkish in next policy seems to be a likely scenario. Therefore, we retain our preferred strategy of focusing on shorter duration portfolios with maturity of 2-4 years providing a steady carry. Long term yields are likely to remain volatile.