Stock Analysis, IPO, Mutual Funds, Bonds & MoreS Krishna Kumar, CIO, Sundaram Mutual says the market has been very realistic in its expectations and knows that it will be a very tight Budget and the government will try to maintain fiscal prudence.ET Now|Last Updated: Jan 29, 2020, 04.04 PM IST|Original: Jan 29, 2020, 03.08 PM ISTRegionally-strong realty players, HFCs could be a play on Budget expectations: S Krishna Kumar, Sundaram MutualGlobal cues have stabilised somewhat. And back home we are closely eyeing the Budget, discussing whether or not we can really anticipate any major cues for the markets this Saturday. What is your sense?Budget is just another event. We have seen a lot of things are getting done outside the Budget. This Budget, we expect a more realistic take on the financial constraints that are there, and other things in terms of rural development and urban infra to chug along. Also, we think it would try to encourage consumption. This year we are going through a major transition in the auto sector from BS IV to BS VI, which requires a leapfrog of effort. It is important that the government realises the need to compensate for the bias, at least for a certain period, given the environment in which we are in. Savings from the previous Budget in terms of bank recapitalisation and other things that were there are not there this year. That money should be used effectively to incentivise or refund some of the GST on auto sector and also encourage the housing sector through some kind of GST refund for those who buy fully built homes and register this year. That would clear up a lot of real estate inventory, keep the job market far more robust and have a big effect on the supply-side of both auto and the real estate industries. That is something which should be very positive for the economy.
In anticipation, would you be buying any of the real estate stocks afresh, because the sector has been grappling but stocks are not? Or any of the ancillaries — sanitaryware, tiles, paints?One can play regionally-strong real estate players in key markets. More importantly, housing finance companies offer great value in terms of growth potential and in terms of benefits from bond yields coming off. That is a good space which we definitely are adding. On the supply side, building materials is something we have been positive on for quite some time. Probably, this has been impacted negatively. But we continue to have faith in them and are adding them at appropriate valuations.
What if we get nothing in the Budget? What if this year’s Budget becomes more like a routine one, little bit of mention of how fiscs would be managed, lot of emphasis on the vision and very limited announcements in terms of action. Will that spook the market? A lot of people I have spoken to are convinced this will be the first Budget of the decade, and given the economic backdrop, this is going to be more like a magical Budget. Are we in for a sharpish post-Budget selloff if we do not get anything on Saturday?
The market has been quite circumspect and realistic in expectations. It will be a very tight Budget and it will try to maintain fiscal prudence. I do not think they are going to sacrifice the direction. However, there would definitely be certain expectations of the vision as you mentioned, like in terms of what Mr Modi has in mind going into 2030. There would be certain wish lists in terms of reforms, but the market definitely does not expect the moon from this Budget. Anything positive would be celebrated. I do not think the market will sell off if it is a 5 on 10 Budget. Given the current economic conditions, we are in for a cyclical recovery and there has been no pre-Budget rally. It has been a rally synchronous with what is happening globally.
One can play regionally-strong real estate players in key markets. More importantly, housing finance companies offer great value in terms of growth potential and in terms of benefits from bond yields coming off.
One can play regionally-strong real estate players in key markets. More importantly, housing finance companies offer great value in terms of growth potential and in terms of benefits from bond yields coming off.-S Krishna Kumar
You have touched upon the fact that we are waiting anything that may aid that cyclical recovery. So you know which are the pockets that you feel are likely to be impacted the most: are you tracking the infrastructure space, roads, housing, real estate? Or are you looking for more of a boost to consumption?If you look at the auto sector in particular, there could be some relief which the industry has been seeking. The second big thing in terms of the auto sector is that there are so many old vehicles, which are faulty and running on streets. So a scrappage policy where the Budget provides allocation of funds on a per-vehicle basis of say about Rs 1 to Rs 2 lakh per vehicle based on the type of CV would be definitely welcome. It will really spring the commercial vehicle industry to fairly good activity and that can have a big repercussion on the core sectors of the economy. So that is an expectation.
On the real estate sector, I think people have been talking about things like TARP, but I think some of the measures taken in the last Budget and after that have not been executed and the benefits are not fully visible. So a game plan to accelerate the benefits for the housing finance sector and developers to come out of their problems would be welcome. That could be an area to look at.
Q3 numbers have not been great. We can talk about one, two or maybe handful of them, and even in those numbers the zing is missing if you take the benefit of corporate tax cut out. The market continues to forge higher. If a cyclical recovery is around the corner, steel, cement, construction, engineering and EPC stocks should start going higher. What is moving still is a Bata, a Page, a Britannia and consumer stocks. What is going on? Consumer demand is slowing down, yet consumer stocks continue to make a new 52-week highs.
Even in the consumer space, there are two parts to it. One is the FMCG guys, who are more secular, seeing steady growth, and then consumer cyclicals or consumer discretionary — be it the auto, durables or white goods, brown goods. There is definitely a pickup in consumer cyclicals, basically in the auto space which has seen a good 10% move in last two months. We have seen a fair bit of activity in consumer cyclicals, in white goods and brown goods — which again have come to life. They are really doing well at this point.
The second point is, steel and cement are not the only cyclicals. Of course they are part of the cyclical bucket, more so if you look at the capital goods space. Also, some of these stocks are under-owned and have moved in last two months. Shares of a number of capital goods companies are close to their 52-week highs at this point. So it is not just EPC companies we are looking at, because EPC companies have their own problems on balance sheets and some of the projects are stuck. So there is little bit of worry there. But people are focusing on industrial goods, consumables on the industrial side, which have been really doing very well.
So it is a broader bucket of companies in the midcap and smallcap segments, which have rallied pretty well. Maybe one of the top engineering giants in the country, which you may be referring to on the EPC side, is still not doing well. Beyond those one or two stocks, others have seen a good traction. If you look at even commercial vehicles, the numbers are doing well now and the expectation of a recovery is really playing through all of them.
What about the broader market? Do you now expect market breadth to improve consistently once the Budget is out of the way? Which way do you see sentiment shaping up, because on one level there has been a lot of expectations that we are perhaps bottoming out and growth will come back, but on the other side, we have not yet seen any concrete sign of that?The indices clearly reflect activity in the broader market. You are seeing that after a long time. Smallcaps and midcaps have outperformed the largecap index for three months now. You have seen the breadth improve. Even among largecaps, it is not that just 10 stocks are moving the indices. While they are consolidating and giving up, money has been flowing into the other parts of the indices — be it pharma, steel or cement, or other spaces like PSU banks. We have seen money flow away from the secular growth story. The contribution of the rally seen in last three to six months has been equally balanced on other sectors and this continues. When this begins to get broadbased, more and more investors and fund managers would move their portfolios to a more balanced diversified position. And that would trigger a stronger rally in the broader market.
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