“Post Budget Analysis & Markets Outlook” with Mr. Amit Khurana, CFA

Contributor: Shivam Garg, CFA

The Delhi chapter of CFA Society India organised a speaker event on 9th Feb 2018 on the topic “Post Budget Analysis & Markets Outlook” with Mr. Amit Khurana, CFA – Director, CFA Society India and Head of Equities & Research, Dolat Capital Market Pvt. Ltd. The annual budget is the most talked about event in a financial year although the practice might become redundant after five to ten years just like railways budget. The agenda for the event was to look at budget’s political message and its impact on markets.


In his presentation titled “Economics of political strategy or vice versa”, Mr. Khurana spoke about how each action in budget had a political connotation attached to it. Some are obvious while others may not be. His first point was on how the government at all international forums talks as a capitalist but acts like a leftist. Nearly sixty-five percent of the budget is about people living in rural areas and farmers. Minimum Support Price (MSP) has been revised to 1.5x of cost of production, though the method & implementation has not been made clear. Universal health care program is the biggest scheme ever announced but with meagre budget allocated to it. Tax rates have been increased and are highest in last so many years which is opposite of what US is doing. LTCG is back which brings us to a point where we have STT, STCG and LTCG in capital markets now. The question is -how do we make profits with so many taxes in this profession? There is an increase in customs duty on raw materials (Make in India) and the disinvestment target is increased to 80K Cr. More consolidation is expected in public sector like HPCL acquisition by ONGC.

Mr. Khurana next gave a summary of important items of the budget like revenue, expenditure, fiscal deficit, etc. He pointed out that nominal GDP growth which is the biggest assumption by finance minister has been kept at 11.5% and tax revenue increase has been assumed at 16.6%. The government has been very disciplined in keeping fiscal deficit number in control. At present, it is at 3.5% of GDP. Oil prices are lower but yet there is highest ever retail prices which shows government has not taken a populist approach here. Subsidies have been kept low on food and fertilizers as well. The Tax to GDP ratio is sustainable at 15-16% for a country. The government has been able to pull it up to 11-12% from 8-10%. GST is expected to bring in windfalls and hence, increase it further. Corporate earnings have not grown but still taxes have been kept high. The subsidies have been rationalized which shows a disciplined approach.

After this, the impact of budget on various sectors was discussed. The sectors having positive impact are – Agrochemicals, BFSI, Cement and building, Consumer Stables, Consumer Durables, Capital Goods, Infrastructure, IT services, Logistics, Media and Real estate. The ones having neutral impact include – Automobile, Energy, Pharma and Power and utilities and tiles sector is expected to have a negative impact.

In the final section, several macro & micro indicators were covered and the outlook for equity markets was discussed. The macro indicators are looking positive. Inflation is under control and oil prices are still low. The government is not reversing any of its decisions unlike previous coalition led UPA government. Investments are driven by steady local money and not the hot money from FIIs. Private sector banks are amongst the best performing stocks whereas pharma is the biggest laggard. Sensex current P/E , P/BV ratios and Standard Deviation are at the highest of all times. The domestic flows have been key support at a steady 6-10K crores infusion in markets every year. EPS is expected to go higher from here. Things seem to be moving in right direction for markets with GST coming in, recognition of bad loans happening and rural economy growing. The only thing is micros are not looking so good as the earnings are not increasing. P/E ratio is highest due to increase in stock prices (P) but no movement in earnings (E). Vix index is lowest for longest periods and inflation is expected to go up as it has not grown in last few quarters.

US 10 year yield will be the most imp metric to observe in next few months. Currently it is at 2.8% and the moment it crosses psychological barrier of 3%, there will be blood bath in equity markets, simply because globally bond markets are much bigger than equity markets. Serious correction is expected in equity markets if this yield moves substantially and quickly. Movement in yields will also driven by inflation. Also, any change in Indian regime is going to bring huge correction in markets. Markets are not ready for the kind of uncertainty that a government change will bring. Worst possible scenario is a third front led govt. Volatility is expected to go up in next few quarters due to incoming elections and changing sentiments around the same



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