Stay tuned to Union Budget this week: Aims to bring growth back on track!

In contrast to the expectation of a pre-budget rally, we had discussed corrective action in the stock markets that was essential for the Indian stock market as stretched valuations created discomfort among the investors. The week gone by was in sync with what we had anticipated; the bears took the lead and made investors experience a roller-coaster ride amid some developments in the global landscape. On the domestic front, the earnings are almost meeting the expectation while, some big names are missing it. The virus outbreak across China and some other parts of the world, took a centre-stage and the spreading of coronavirus has aggravated a headache to the global economy watchers and managers. Some reports have been surfacing in the media that the second-biggest economy of the world i.e. China’s economic growth may drop to five per cent or even lower, due to coronavirus outbreak. Meanwhile, the World Health Organisation (WHO) has called a meeting of its emergence committee to consider issuing a global alarm as the number of coronavirus cases in China has already surpassed the Severe Acute Respiratory Syndrome (SARS). The disappointing earnings are another reason to fall. With a lack of demand and margin expansions, this earning season is becoming dull in all aspects. As we are trading at a historical high PE zone, without the support of earnings, the market tends to slip downwards. Despite this, our theme of broader markets calling the shots in January series has played out extremely well.

The market participants have their one eye on Coronavirus and the other one on the mega event of Indian markets i.e. Union Budget, which will be presented on February 1, 2020. It is being said that it would be one of the toughest tasks in the career of Finance Minister, as she needs to strike a perfect balance of maintaining a fiscal prudence and spurring economic growth. It was not long back when Indian economy received a tag of the world’s fastest growing major economy, but, thereafter, the numbers turned upside down as the economic growth slowed to five per cent in the first quarter and to 4.5 per cent in the second quarter of this fiscal. The theme for Union Budget 2020 will be getting growth back on track, especially with a focus on infrastructure. Along with this, there would be a focus on job creation and also on giving a push to entrepreneurship as well as micro, small and medium enterprises.

A big question ahead of the day is-Will Nirmala Sitharaman’s Budget be able to recuperate animal spirits and provide boost to consumer spending? This government has some hurdles on the fiscal front, i.e. not ready for any bigboom fiscal stimulus as greater than expected fiscal slippage may result into India’s rating downgrading. Thus, she may opt for a small-ticket cut in the personal tax without any exemptions, so that at the end of the day, the hard-working class earners are able to save as well as spend as per choice thereby, acting as a boost for consumer spending and stimulating the economy, which is under stagflation (lower growth & higher inflation).

Further, we believe that whatever measures will be announced on the Budget day, it will not be the end of measures to revive the economy. As we have seen in the past, this government does not wait for any special day for any major announcement or steps to revive the economy. Volatility is expected to be elevated in the wake of Budget day and thus, we believe that investors should capitalise as an incremental buying opportunity in the stocks that are having sustainable earnings growth trajectory historically and expect to continue this momentum in future too. After all, one can reach to one's destination by looking at the windshield and not by looking at the rear mirror. It is hard to find such an opportunity at discounted prices, but looking at the current scenario, we may find some opportunity in the near term, not at steep discount, but at a decent level. The level of 11,800 is a major support for the markets and any fall below this level could be the first indication of a trend reversal.