Budget 2024: A Masterclass for Investors

The Budget is presented, the markets have reacted, and the dust has finally settled. However, investors are still seeking answers. Should they maintain their current investment strategies or tread cautiously in the market? What should they buy, and what should they avoid?

Mint, in collaboration with HDFC Securities, conducted a post-budget masterclass with market experts Deepak Jasani, Head of  Retail Research at HDFC Securities; Unmesh Sharma, Head of Institutional Equities, HDFC Securities; and Varun Lohchab, Head of Institutional Research  at HDFC securities to decode the answers and help investors chart a path for future.

Market Reactions and Post-Budget Impact 

On Budget Day, we saw some initial negative reactions because of the hike in capital gains tax and STT. But the fear was overcome very soon. The market ended almost flat on that day, and after that, the markets have been rising gradually. The increase in STT and capital gains tax is not going to materially impact the retail investors unless they are active traders. And gradually, even active traders will adapt to the new taxes.

However, Deepak Jasani believes markets are at a high level. There might be some upside left. But investors must be “cautiously optimistic”. It is a good time for retail investors to review their asset allocation. They might diversify to other asset classes like gold, fixed income, or real estate, etc.

The question arises: will the Budget lead to long-term shifts in Investment behaviour?  Unmesh feels that in the long run, the 12.5% LTCG tax rate feels odd – it raises questions about future adjustments. While domestic mutual funds have clear tax rules, many foreign investors don’t pay capital gains tax in their countries. So, when comparing returns, India’s taxes could reduce its long-term attractiveness.

Decoding Government Priorities and Budget Impact on Growth Trajectory

Unmesh lauded the government for a “commendable job on fiscal consolidation.” The 4.9% fiscal deficit target was unexpected and impressive. “The government’s long-term priorities like education, skill development, infrastructure, and crowding in the private sector are solid steps forward,” he stated.  

From an investor’s perspective, India is becoming more attractive. The sovereign and corporate balance sheets are in great shape. The government is supporting the lower economic strata, ensuring household balance sheets remain strong.

Unmesh feels that the base for the next round of earnings growth looks solid, making India a great place for investment. However, managing short-term volatility will be crucial to capitalize on this potential.

Strategic Investment Insights: Navigating the Post-Budget Landscape in India

Varun Lohchab mentioned that over the past couple of years, we’ve seen strong performance from industrials, infrastructure, manufacturing, and real estate sectors. Now, it looks like the focus should shift to consumption-related sectors. As job creation ramps up and more money flows in through employment, consumption is set to rise.

Given this shift, Varun feels it’s wise to rebalance portfolios. “Industrial sector valuations have skyrocketed, so consumer sectors might be more attractive now. Investors can also keep an eye on new business models emerging from workforce scaling over the next decade,” he marks.

Speaking of attractive sectors for investment, Deepak emphasized that “Consumer goods are expected to benefit the most from the budget, especially with the rural and agriculture focus and employment-linked incentives.”

The IT sector is showing signs of resurgence. Oil and gas stocks are looking good, while defence and railway stocks seem overvalued to Deepak. He feels realty  might not perform well in the short term and could consolidate for a while. According to him, the pharmaceutical sector is looking good. But investors need to be stock-specific.

Green energy remains a key theme, but EVs have reached a global penetration ceiling, so investing in this sector should be cautious. Hybrid vehicles, along with solar and wind energy, also hold promise.

According to Unmesh, “A key long-term theme to consider is the financialization of savings and insurance. Additionally, there’s been a bit more focus on railways over roads, so companies in the railway sector might be worth a look. And, of course, the consumption theme is significant, especially as employment and job creation increase.”

Government Strategies and Policies for Managing Inflation in India

Inflation is challenging to control in the short term due to its multiple influencing factors. In India, monetary policy can manage only about half of the inflation, with fiscal policy handling the rest. A major component not addressed directly in the Budget is the Minimum Support Price (MSP) for crops. The government is focusing on long-term solutions to inflation, such as improving crop insurance, irrigation, and direct benefit transfers.

Fuel prices are another crucial factor. The government has effectively minimized fuel subsidies, which have decreased from lakhs of crores to a few thousand crores. By keeping taxes high and managing fuel prices better, they are working to control inflation structurally. Additionally, advancements in green hydrogen and fuel indigenization aim to further stabilize inflation, leaving the RBI to focus on its monetary policy role.

Assessing India’s Resilience Amid Global Economic Dynamics

While India is increasingly connected to the global economy, it’s not yet highly dependent on global growth for its own economic performance. Unmesh highlighted that inflation is easing, and we may be looking at possible rate cuts in the future. This could make global equity markets, including emerging markets like India, more attractive. However, the shift in investment might also favour debt or developed markets, which could affect how much capital flows into India. This is because while India is performing relatively well, it’s currently expensive and global uncertainties are not yet factored in. 

Final Words for Retail Investors

Considering the recent Budget, retail investors should periodically review and rebalance their portfolios. This will help ensure steady returns and manage risk effectively. Long-term investors should remain invested, focusing on whether stock valuations align with earnings and avoiding short-term thematic investments. Long-term investors must maintain a well-diversified portfolio and prevent overexposure to any sector.

Given the relatively benign market conditions of the past few years, it may now be wise to rely on market and research experts for a more strategic, medium to long-term investment approach.