Budget 2024: Govt may announce sops for the middle class, rural segments: Rupen Rajguru of Julius Baer India

Rupen Rajguru, Head Equity Investments and Strategy, Julius Baer India, expects the Interim Budget to record better fiscal balances, generating space for higher social spending. He also expects the government to announce sops for the middle class (promote new income tax regime, housing, etc.) and rural segments. In an interview with Mint, Rajguru shared his views on markets and Q3 earnings. Edited excerpts:

What are your expectations from the Interim Budget 2024? What sectors are likely to get a boost from the Budget?

Since 2024 is an election year, the finance minister will present the Interim Budget or Vote on Account in February, and the full-fledged Budget is expected in July after the formation of the new government. 

As a Vote on Account is merely an interim authorisation to spend money, we do not expect any significant tax or big bang policy reforms. 

Additionally, with the announcement of the election dates around mid-March, the Model Code of Conduct (MCC) is expected to come into effect, barring the government from announcing any policy decisions. 

With that backdrop, we expect the Interim Budget to record better fiscal balances, generating space for higher social spending. 

We also expect the government to announce sops for the middle class (promote new income tax regime, housing, etc.) and rural segments. 

Finally, we expect the government’s focus on public infrastructure to drive capex growth to continue with an emphasis on increasing the domestic manufacturing base, which could involve tweaking.

Also Read: Budget 2024 Expectations Live Updates: Here is what tourism, real estate, fintech, EV and other sectors demand from FM

What budgetary measures could boost market sentiment?

As discussed above, we do not expect any major policy reforms to be announced in the Interim Budget. 

Nevertheless, it will provide an opportunity for the government to underscore its economic accomplishments in the lead-up to the 2024 General Elections. 

From the market perspective, announcements towards the quality of spending (focus on capital expenditure over revenue expenditure), and fiscal discipline (roadmap towards reducing the fiscal deficit to 4.5 per cent by FY26E) will be cheered by the markets. 

Markets are expecting the Budget to focus on (a) capex – which can have a positive multiplier effect and boost overall employment, and (b) rural recovery - as the rural sentiments/consumption has been marred by high inflation.

Also Read: Budget 2024: No sharp cutback in capex; focus may be on women-centric policies, says Achala Jethmalani of RBL Bank

What is your short-term view of the market? Can it remain in a range till the General Elections?

The calendar year 2023 (CY23) was an eventful year for the equity markets. 

The Indian markets delivered a return of nearly 20 per cent, and the small and midcaps (SMID) segment delivered more than two times the Nifty returns. 

The structural story for India remains intact: Earnings + capex + credit growth. India has entered a phase wherein for the next few years earnings growth will be greater than the nominal GDP. 

After a solid 23 per cent earnings CAGR over FY20-23, Nifty posted 30 per cent earnings growth in the first half of the current financial year (H1FY24), a beat versus the expectation of 23 per cent. 

Consensus is building nearly 15 per cent EPS CAGR for FY23-26, led by BFSI and autos. 

In CY24, we expect (a) a soft landing for the US, (b) policy pivot - Fed rate cuts from H2CY24, and (c) a stable USD with a downward bias. 

These factors should benefit emerging markets (EMs) with a revival in FII flows. 

Besides, we expect India’s macro to stay robust -the highest GDP growth among G20 nations, continued fiscal consolidation and curtailment in government debt/GDP, and a stable INR. 

Overall, we continue to remain constructive on the Indian equity markets, driven by the continuation of momentum of the earnings cycle and strong domestic liquidity, coupled with the comeback of FPI flows. 

Markets could be volatile in H1CY24 as debates persist around the US hard versus soft landing, the timing of the first rate cut by the Fed, and India’s general elections outcome.

When do you expect the US Fed to start reducing rates? Do you think a shallow rate cut may disappoint the market?

The global equity markets have got a big boost from the recent US Fed pivot, wherein it indicated a possible 75bps rate cut in total in CY24 and another 100bps in CY25. 

The markets have started pricing in a more aggressive rate cut scenario by the Fed of a total of 150bps in CY24 itself, with the first cut expected in March’24. 

While we do believe that the rate cycle has peaked and this year will be marked by a gradual reduction of rates, however, we believe that the Fed would still maintain a balanced and data-dependent approach and will most likely cut rates starting May’24, with the rate cut cycle expected to extend over the next couple of years. 

In case the Fed cuts are less aggressive and later than what the markets are currently expecting, it can result in some intermittent risk-off and volatility in the markets.

How could a slowdown in the US economy impact us? Will it mean an aggravated selloff by FPIs?

The global economy is slowing down with the burden of the ‘higher for longer’ interest rates dragging down demand/growth across the Western world. 

However, the overall economic environment in the US has held on well, as reflected in the labour data and the economic activity, despite the restrictive monetary policy. 

Hence, while the US economy is expected to slow down, it is expected to be more like a soft landing rather than a recession which was earlier feared. 

On the positive side, the continuing corporate earnings momentum and reversal of the rate cycle are expected to be supportive for the markets. 

A gradual recovery in earnings through 2024, coupled with a benign USD makes way for a constructive outlook on global equities and FPI flows, especially in developed markets. 

A risk to this view, apart from geopolitical factors, could emerge in the form of any restrictive policies (such as increased tariffs) implemented by the US to promote domestic manufacturing, which could distort global trade.

How do you see the Q3 earnings of Indian firms so far? What sectors could see an upgrade/downgrade?

We are still in the early days of the Q3FY24 earnings season, and although some sectors such as financials and consumption have seen some strain, the overall earnings picture is expected to be largely in place. 

While the Banks saw steady credit growth and decent asset quality, some pressure points emerged in the form of sequential pressure on NIMs and deposit growth. 

The consumption sector remains plagued by weak volume growth, especially in rural markets, although benign input costs are aiding margin improvement. 

The IT sector delivered a beat to the muted street expectations, while the healthy deal flows/pipeline and an expected soft landing in the US could support a constructive commentary around demand. 

Cement companies have delivered healthy numbers with a marked improvement in profitability (EBITDA/ton) amid benign input costs and decent improvement in volumes. 

The healthcare sector seems to be getting support from an improved pricing environment in the US, while the industrial sector is benefiting from the robust order inflows and order book. 

Oil marketing companies (OMCs) have also turned in better-than-expected numbers on robust inventory gains despite some weakness in the GRMs. 

To sum up, the earnings season seems to be progressing largely in line with expectations, with the estimates for the current year and next year largely expected to be maintained.

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Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before making any investment decisions.