For 2022, Capital Return Should Be The Key Investment Mantra : Shiv Sehgal
The Union Budget 2022-23 has made decisions on various sectors of Indian markets. In an interview with Shiv Sehgal, President and Head Institutional Equities of Edelweiss Securities, spoke about the budget decisions, Indian markets, and digital currency.
How would you rate this budget in terms of how it has balanced growth and fiscal prudence? What would you say the top takeaways were?
In this years’ budget, the Finance Minister was walking a tightrope of nurturing growth (given nascent and narrow recovery) and at the same time ensuring macro stability (as trade deficit is elevated and Fed is gearing for tightening). In this context, I would say that FM has done a good job of managing both. Despite the challenges, fiscal math is conservative, credible and transparent. Populist temptations of providing income support have been resisted. Rather, there is a clear push towards capex (which has higher growth multiplier) and hence would augur well for long term prospects. Thus, my key takeaways are that it was a balanced, growth supportive and credible budget.
Do you think the higher-than-expected borrowing is a concern for the bond markets? The reaction seems to have been negative on the budget day.
While the fiscal deficit is consolidated, the higher than expected borrowing had spooked the bond markets on budget day. In my view borrowings also need to take into account those done by quasi government agencies like NHAI, railways, etc. which has moderated significantly. Also, domestic demand is not yet very strong to have concerns on government borrowing. Further, for bond yields RBI’s actions will be critical. In the last two years, RBI has funded 25-30 per cent of net market borrowings. While they have been on the sidelines since August 2021, the central bank still remains very Dovish and the RBI governor indicated that bond yields might be rising too fast and seemed a little uncomfortable with the same.
We've seen broad markets selling off over the past few sessions, and the NIFTY is dangerously close to slipping below 17K. Would you think this is a slightly delayed reaction to the budget?
When it comes to equites, a host of factors matter with budget being just one of them. Global factors have a very large role in shaping equity market sentiments. In recent months, a very hawkish Fed has resulted in equities across the world coming under pressure. A somewhat narrow earnings hasn’t helped much either. Hence, the combination of global factors and mixed earnings outlook is a big driver of recent market volatility rather than the budget itself.
What sectors or themes do you think will be positively impacted by the budget over the long term?
I think industrials, infrastructure and banks will likely be positively impacted by the budget over the long term given its focus area.
Do you think that the roll out of a digital rupee is a net positive or net negative for the banking sector?
The effective roll out of the same is going to take a long time, hence actual impact will take time to come. Nonetheless, directionally it should be positive as it reduces transaction costs.
Do you think that the RBI is going to be increasing rates over the next few months and quarters? How do you see that impacting the markets in 2022?
Unlike the past, this RBI is far more dovish and has clearly mentioned that growth will be a priority. However, with Fed gearing up for aggressive rate hikes, RBI faces tough policy choices. It can follow Fed and raise rates, but could weigh on domestic growth (which is anyways nascent and narrow). The second option is to rein in rates, but will entail INR depreciation. While RBI is unlikely to take corner positions, it will likely lean towards reining in rates which could result in INR depreciation (which is anyways overvalued). Hence, to that extent we don’t think RBI is likely to raise rates anytime soon unless there is very large pressure on INR.
Lastly, please do share any parting words of wisdom for investors right now
Last two years, despite the pandemic and impact on the economy and health, equity markets have had a dream run. However, in 2022 while COVID risks should most likely ebb which should aid economic rebound the outlook for equity markets is more sombre. This is because policy support is being withdrawn when growth is still nascent and hence to that extent return expectations should be moderated. For 2022, return of capital rather than return on capital should be the key investment mantra.
