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'Markets won't see a blind rally post Budget'

January 27, 2022 07:32 IST

'The markets seem apprehensive and that explains why the markets have been feeling slightly uncomfortable ahead of the Budget.'
'After the event, when all the concerns are resolved and clarity emerges, markets will decide what to do next.'

Photograph: Reuters

Narendra Solanki, Head -- Equity Research (Fundamental) -- Anand Rathi Shares & Stock Brokers, shares with Prasanna D Zore/ the apprehensions that led to the recent selloff in the markets and how the markets will discount key macroeconomic events like the Union Budget 2022-2023.


How do you look at the recent fall in the stock market? Is it about correction or valuation-adjustment or panic gripping the markets?

It's a mix of number of factors. If you go three months back when the Omicron variant actually began, we saw the first signs of panic then. After that markets recovered a bit and then we came to know that US Fed has decided to taper (its bond purchase programme) and cut down on the liquidity. Further, the US Fed also gave the timeline for rate hikes in the next two years.

These two factors saw liquidity flying out.

Coming to the latest selloff that we witnessed since January 18 it could be attributed to the geopolitical situations in both Eastern Europe as well as the Middle East.

This added to the already fragile markets.

Just yesterday (January 24), we saw a major knee-jerk reaction given that we are already into the result season (announcements of quarterly earnings).

This recent fall has helped Indian markets become attractive on the valuations front given the 10 per cent market correction from all-time highs we saw in October 2021.

The Fed decided on Wednesday not to hike interest rates, we have the Budget next week. Do you see some kind of buying emerging in Indian markets after that?

Definitely, investors are keenly watching the US Fed meeting; after that the key event would be the Budget. But as we have been witnessing in the last couple of years most of the measures (macro- as well as micro-economic) that are required to be taken happen throughout the year. The government doesn't wait for the Budget to take corrective measures as and when required.

But nothing much is expected from the Budget except for continuation of spending in the healthcare and infrastructure sectors. Overall, we could see a neutral Budget (for equity markets).

Last year, a week before the Budget, the market sold off heavily and then recouped its losses, consolidated for a three months and then saw a sharp upswing.
This year as well the pre-Budget pattern seems to have continued.
Do you expect the post-Budget pattern repeating itself as well?

This happened in the past as you said, and yesterday (January 24)'s move (on the upside after a steep 3 per cent fall and the follow up buying on January 25).

Last year, the markets fell before the Budget as it were apprehensive about the kind of fiscal measures that could be announced to tackle the economic impact of Covid and its impact on the fiscal health of the economy.

This year as well, the markets seem apprehensive and that explains why the markets have been feeling slightly uncomfortable ahead of the Budget. After the event, when all the concerns are resolved and clarity emerges, markets will decide what to do next.

With Monday's panic fall and Tuesday's upswing from the day's low, do you feel selling has abated in the market in the short term? Do you see some buying will emerge going ahead?

From a valuation point of view, one would think likewise since the markets have corrected sharply by around 10 per cent from its all-time high.

And as the result season progresses and companies declare results in line with expectations, the markets will definitely take it positively; after the key events get over, the market would definitely take a look at where the valuations are, where the growth trajectory is and then it would react accordingly.

Post these key events, we feel the market will be in a stock-specific kind of regime rather than go for a blind rally that we saw before.

Which companies do you believe are in a position to show decent earnings growth in the next two-three years?

Primarily, the companies which will show strong growth in revenues and margins -- though, we have been seeing companies' margins getting hit due to supply chain, material costs and logistics issues -- across the sectors will get investors' attention.

Any sectors that look poised to perform better on the parameters you mentioned?

We would not like to name any specific stocks yet as we are still in the midst of the earnings season, but IT continues to do well and looks better, along with the specialty chemicals segment.

In the financial sector, some banks private banks are showing good results, their provisioning has come down and that has resulted in improved profitability.

Manufacturing sector is expected to do well; infrastructure and capital goods segments have also started to do better.

Are you expecting any major setbacks in the budget? Markets are agog with talks of introduction of wealth tax and increase in long term capital gains tax? Do you think we will see a populist budget unfolding on Feb 1?

The finance ministry has already given clarity on this news item and that is all about this issue.

Have the markets started discounting FY23 earnings?

Since we have already covered one-third of the last quarter of this financial year this is the perfect time for the markets to start factoring in FY23 earnings (financial year ending March 31, 2023).

On a consensus basis, Nifty is being valued at Rs 800 earnings per share for FY23 thereby valuing Nifty at a multiple of 21.