Budget to focus on doubling farmer income; 7 sectors which are likely to do well: Sanctum

Most analysts expect the government to focus on increasing government expenditure on rural economy as well as introduce a measure to kick-start investment cycle in the economy.

  

The next big trigger for India market is Budget 2018 which will be the last full Budget of the Modi-government ahead of general elections 2019.

Most analysts expect the government to focus on increasing government expenditure on rural economy as well as introduce a measure to kick-start investment cycle in the economy.

In the upcoming Union Budget, the government is expected to focus on infrastructure and the rural sector. The prime objective is to generate employment in the rural sector by the implementation of various measures.

With the government expecting growth to come through structural reforms, and elections in Gujarat out of the way, agri and rural initiatives will be a core focus, alongside infrastructure and rural investment.

The government will continue to push forward on doubling of farmer income. The government is also committed to push through reforms in the public banking system, including recapitalization and initiatives to strengthen governance and clean up balance sheets.

We expect the government to relax its glide path on fiscal deficit and GDP to remain steady at 3.2 percent. Finally, the government is likely to push through further structural reforms, which may include the linking of benami properties to Aadhaar.

Globally, we are witnessing the unwinding of central bank balance sheets. We could see some liquidity unwind. However, FII flows have been strong post the Moody’s upgrade and clarity on the benefits of reforms that the government has put forth.

Markets are certainly expensive at current levels and the PE expansion story is largely over. Should earnings not come through, there is a likelihood of a correction and a possible re-rating.

However, we believe the structural story remains intact and growth is likely to come through at a level higher than many participants expect.

While the index may remain expensive, investors’ returns will be largely determined by the funds and equities in their portfolios.

Therefore, we believe investors are better suited focusing on the valuations of the securities in their portfolios and fund management expertise.

Buying the dip is a strategy that works well in a bull market, but will probably exacerbate losses in a bear market. All investment decisions should be made within a framework with a competently experienced advisor.

We think earnings are likely to grow in the mid-teens for the next two years. Assigning a slightly higher than average multiple leads us to an upside of low double digits.

We would note that there will be a wide dispersion in performance within sectors and get the sectoral call right will be important.

Industrials, financials (private banks), infrastructure, autos & auto ancillaries (4 wheeler), consumer discretionary & staples.

Crude was a large concern for us earlier this year. The Nov 30th OPEC meeting providing some color and clarity. It is unlikely that two of the three major producers – the US and Russia – are going to allow a spike in the price of crude.

With that out of the way, a rise of USD 5 to USD 70 cannot be ruled out, but remains manageable for the domestic economy. The possibility that the government will absorb some of the hike ahead of elections remains a probable scenario.

On a global level, production levels are surging for the US as shale producers are coming online and increasing production. So the crude scenario looks manageable.

The US yield curve was an area of concern and the long end has risen. The big risks for the markets today would appear to be inflation, valuations, and non-performing loans.

We think inflation was driven higher by seasonal spikes in core food items. These will mitigate in coming months. In an improving macro backdrop and a focused government intent on addressing NPAs, we think that the problem will remain contained and show

improvement.

Finally, valuations remain a concern, however one that will be addressed via earnings improvement. The remaining risk is the risk that we aren’t considering, the known unknown.

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