Niraj Kumar CIO

Original article is published in Moneycontrol

Niraj Kumar, Chief Investment Officer at Future Generali Life Insurance India, says the Budget is expected to be pragmatic and strike a fine balance between the need to spend on populist heads, especially agriculture and rural development, and continue being investment-oriented with thrust on growth revival via capex and infrastructure spend.

We don't expect Budget 2022 to throw any curveballs that may impair the momentum of markets and the economy," says Kumar. However, "in case the government embarks on a tighter fiscal policy and surprises the Street with a lower than factored fiscal deficit, then it may buoy bond markets."

Could the Budget focus more on populist measures, especially ahead of States Elections, or would it be a growth-focused budget?

With Budget 2021 being hallmarked as a historic and pro-growth Budget, the stage is now set for a good follow-up in 2022. Budget 2022 beckons for a dexterous balancing act to achieve and that should do all that it takes for a sustained 8 per cent growth path in the post-pandemic era while ensuring fiscal prudence. With the Monetary policy embarking on the tightening path, the baton obviously lies on the fiscal policy i.e., the government. However, fiscal prudence would be the chosen path over fiscal profligacy, given that Budget 2022 will be presented in the backdrop of tighter global monetary policy, rising inflation & higher yields.

While the government is posed with the difficult task of fiscal consolidation amid an uneven growth outlook, rising inflation and rising CAD (current account deficit), it is likely that it will consolidate in a gradual manner amidst a credible medium-term framework. Besides, the fact that government will have some fiscal space this year as COVID abates, will provide headroom to the government to focus on pro-growth measures.

Will the government focus more on sectors that generate more employment or sectors that are affected the most by the pandemic?

We can expect the government to strike a reasonable balance between the focus on employment generation and providing a healing mechanism for the impacted sectors. The focus will be on long-term growth propellers such as continuing focus on infrastructure, PLI (production-linked incentive) scheme for manufacturing, and national monetization pipeline along with the renewed push for privatization/disinvestment.

Budget 2022 should present some progressive reforms directed towards Agriculture and Manufacturing sectors, enabling them to achieve their true potential. Budget 2022 should at the same time focus on providing the funding for the reeling informal sector, MSME’s and contact heavy intensive services sectors viz. travel and hospitality, which has been impacted by the pandemic. It is likely that the government would steer clear from dole-outs and focus more on credit guarantees and institutional support, as has been the response in the last two years of the pandemic.

What could be a surprising element in the Budget, if any?

we don't expect Budget 2022 to throw any curveballs that may impair the momentum of markets and the economy. However, in case the government embarks on a tighter fiscal policy and surprises the street with a lower than factored fiscal deficit, then it may buoy bond markets given the lower borrowing, while the equity markets may clamor around growth concerns.

What could be the factors that can drive the market rally on the budget day or persuade FPIs to pump in money on the budget day?

The impact of the budget on the market has been on a secular decline, however, market participants still need to navigate volatility. However, the market would laud a Pro-growth budget with funds channelized towards targeted capex, and any big infrastructure and real estate push will be perceived positively and could support a rally and direct FPI buying in select large caps and sector leaders.

Key factors that will impact the market momentum on the budget day would be credible fiscal deficit target, the government's spending plans vs. fiscal consolidation, changes to long-term capital gains tax, changes to tax rates, push for “Make in India’ and timing & quantum of asset sales along with targeted consumption related incentives. Overall, a growth supportive budget with the focal point being the requisite growth push reforms while ensuring fiscal prudence will augur well for FPI flows to India.

After Budget, what are the other important events or factors to watch out for in the rest of 2022?

The most important event will be whether we are indeed progressing from pandemic to endemic, which will have a directional impact on the economy and markets. We reckon earnings performance will reflect the equity markets performance in the near term. Markets have indeed priced in strong earnings growth over FY22 & FY23. Delivery of earnings is critical for markets to sustain the current elevated levels of valuations. Beyond Earnings & Budget, there are a few events on the horizon that can create triggers to cause volatility in the markets.

Do you expect the market to give a double-digit return in 2022 and close the year above 21,000 on the Nifty50? Also in 2022, do you think the market will still be worried about the expected rate hikes by Fed, inflation, and Covid.?

After a stupendous rally in markets the last two pandemic years, we believe that the phase of easy money might be over in markets and CY22 is expected to be a stock pickers market. Given the elevated valuations, the biggest concern for markets would be earnings growth and not COVID or interest rate hikes. We expect market returns would closely track earnings growth. Markets over the last 18 months have been quite charitable and stocks across the board have rallied irrespective of the stock fundamentals. 2022 could be different in that regard and any disappointment in earnings may follow with a sharp negative reaction. While we continue to expect strong earnings growth in FY23 (High teens), the trends are going to be divergent across sectors and hence one needs to be careful about sector/stock selection.

Niraj Kumar