In terms of the macros, we are seeing a continuation of prudent policies that defined the budgets of the past three years
The Budget 2017 proposals are positive for financial assets and the returns from equity is expected to remain on an uptrend. In terms of the macros, we are seeing a continuation of prudent policies that defined the budgets of the past three years. Two things stand out. One, the Budget continues to support financial assets, which productive assets for the economy. Two, physical assets are being slowly discouraged, the incremental capital output to the economy is very low.
On this front, one of the Budget proposals in case of real estate is to restrict the tax benefits in the case of house property. This will continue to drive people away from physical assets like as real estate.
Gold has not delivered great returns over the last three years. Before this, gold returns were a factor of the rupee-dollar exchange rate. Now with the country’s current account deficit under control, the exchange rate is likely to remain well-balanced. Hence, gold’s not really likely to be a favourable an asset class with investors.
Hence, the flows into the capital markets and towards financial assets will become increasingly robust in the coming months. We have been advising investment in equity to be spread over a few months until March 2017, but the current scenario makes it compelling to invest lump-sum amounts into equities on a priority basis, particularly if you are underweight on this asset class. Overall, we expect corporate earnings to steadily increase over the next 2 years.
In terms of themes, we are highly positive on the infrastructure sector. We expect this sector to do well over the next two years. The government’s support to this sector with its intent to improve the country’s infrastructure is positive. This sector has been an underdog for many years and investors will benefit due to current low valuations.
Another theme to look out for is the IT sector. With the US political scenario currently being a challenge for this sector, it is presently at a low valuation, and will offer good risk-adjusted returns.
Budget 2017 has been balanced on the numbers and projections. The corporate, excise and service tax targets that are proposed are reasonable and likely to be achieved. In case of individual taxes, the projections are a tad higher, but government’s data analysis on this front will help collect the expected increase of 25 percent in direct taxes.
In case of indirect taxes, there are no proposed changes. This clearly indicates the government’s intention to implement GST. There might be hiccups in the implementation process, but we believe these will be overcome.
From the macro perspective, no big fiscal stimulus has been announced in the budget. The whole thesis of the government is to create a healthy macro-economic environment with a low current account deficit, under-controlled fiscal deficit and low inflation. This again will encourage money to come into financial assets, which, in turn, will help economic growth.
As we expected, the government has kept the path of fiscal consolidation in mind pegging the fiscal deficit at 3.2 percent for next year, with the target of 3 percent for 2018-19. Given the circumstances, that is a pragmatic move by the government.
The rural focus and increase in spending on infrastructure is a positive outcome. Giving infrastructure status to affordable housing is also a welcome move. The reduction in income tax in the lowest tax bracket is will enhance savings in the hands of people. This will also positively help the capital markets.
To conclude, Budget 2017 provides the impetus for further growth in equity valuations. Overall, the budget has been very positive. Hence, we believe that investors should continue to repose their faith in financial assets and continue to invest in equity assets.
With the inflows into financial savings set to rise because of the broader budget moves, the market’s price-to-earnings looks to get re-rated. Hence, investors should keep investing in financial assets regularly. For lump-sum investors, the model way to invest in the market is to invest through dynamic asset allocation funds.
This article was first published in The Indian Express on February 02, 2017.