As Finance Minister Nirmala Sitharaman gears up to present the Union Budget 2024 budget, Indian stock market investors are strategizing their moves to navigate the anticipated fiscal policies.
The upcoming budget is expected to be themed on fiscal prudence, capex spending to help create jobs and targeted social sector spending. According to Morgan Stanley, FM Sitharaman may retain the central government’s fiscal deficit target at 5.1% of GDP in F2025, while being on track to attain the target of 4.5% of GDP by F2026.
It also expects the focus to remain on capex expenditure over revenue expenditure and targeted social sector spending with focus on improving access to physical, social and digital infrastructure. The budget is also estimated to provide a road-map for a medium-term plan for fiscal consolidation beyond FY26.
Stock market performance around budget
According to Morgan Stanley analysis, the stock market falls on two of three occasions in the 30 days post the budget. The probability of such a fall rises to 80% if the market has risen in the 30 days preceding the budget. Only twice in 30 years has the Indian stock market been up both pre and post the budget.
This year, India is tracking higher on both an absolute and relative basis and if it were to hold this performance into the budget day, then there is a strong likelihood that it corrects post budget, the analysis said.
Equity Market Strategy
The impact of budget on the Indian stock market has diminished over time, but market performance often hinges on pre-budget expectations. Currently, there is a palpable sense of exuberance in the stock market, which may lead to volatility and potential corrections post-budget.
According to Morgan Stanley, Indian stock market investors should focus on these three thing:
Fiscal Consolidation: For the market, the extent of fiscal consolidation will be crucial. Any deviation from the fiscal deficit target, even by 0 to 10 bps of GDP, can influence the stock market. According to Morgan Stanley, a contraction in the fiscal deficit below 5% may not please the equity market.
Infrastructure Spending: A 20-25 bps increase in GDP spending on physical and social infrastructure over the interim budget could also impact the market dynamics.
If the government focuses on consolidating the fiscal, Morgan Stanley expects financials to outperform. If it prefers spending (rural and infrastructure spending), consumer discretionary and industrial stocks will likely fare better. The brokerage firm is overweight on all three sectors.
Sector-Level Incentives: Morgan Stanley believes the market could be surprised by the lack of major tax cuts or redistribution spends. It does not expect major changes to capital gains tax rates for equities. Specific sectoral incentives and spending will be crucial.
Morgan Stanley remains overweight on Financials, Consumer Discretionary, Industrials and Technology and underweight on all other sectors.
Macro Strategy
The projection of budget deficit suggests no significant changes in the gross and net issuance of government securities (G-Secs). The demand for G-Secs remains strong, driven by foreign investor interest, particularly due to India’s inclusion in the JPMorgan GBI-EM index. Despite no anticipated rate cuts, Morgan Stanley views the Indian Rupee (INR) and G-Secs as attractive carry trades.
It recommends short CNH/INR and TWD/INR and long 10-year G-Secs with FX hedge.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
