Expert View | Budget 2024 to boost domestic cyclicals, traders must avoid knee-jerk reactions: Alchemy’s Alok Agarwal

Indian stock market continues its record bull run, picked up since June-end led by the return of foreign inflows, albeit with few phases of consolidation with the new earnings season. Bulls have tightened their grip on D-Street after a spectacular month-opening ahead of the Union Budget 2024 scheduled for later this month.

Most industry experts anticipate some income tax relief for salaried employees and also expect the government to focus on fiscal consolidation and capital expenditure. Finance Minister Nirmala Sitharaman will unveil the newly elected Modi 3.0 government's first Union Budget 2024 on July 23, 2024.

In the current market scenario, Alok Agarwal, Head—Quant & Fund Manager of investment management firm Alchemy Capital Management, said in an interview with Mint's Nikita Prasad that investors should avoid knee-jerk reactions on Budget day and focus on fundamentals. Agarwal also expects the government to raise the capex target by 20-25 per cent from FY24 and sees domestic cyclical benefitting from the upcoming Budget announcements. 
 

Edited excerpts from the interview:

1. How will the upcoming Budget announcement impact the stock market, and which sectoral index will likely move the most? What are your major expectations from Modi 3.0's first Union Budget for market participants?

After the surprise verdict in the General Elections, all eyes are on the upcoming Budget announcement, which is poised to impact the Indian stock market significantly. Historically, budget announcements have led to market volatility, with certain sectors experiencing more significant movements based on policy changes and fiscal measures.

There are expectations of higher allocations to the consumer sector, especially in rural areas. However, the government is also expected to continue with its capex programs. The additional costs of higher allocations for consumption and rural could be more than offset by the additional dividend bonanza from the RBI this year. This balancing act will be closely monitored.

Without deviating from the current framework of prudent fiscal policy, we anticipate that the July 2024 Union Budget will include a combination of

(1)Increased capital expenditure targets,
(2) Larger allocation to the rural and agricultural sectors, and
(3) More fiscal consolidation.

There may be space in the July 2024 budget to enhance funding for capex, including highways, trains, and perhaps even state loans. Given the intent and state of finances, there is a possibility of seeing an overall capex expansion of 20-25 per cent versus FY24 (up from 17 per cent in the interim budget announced in February 2024). 

Also Read: Budget 2024: L&T to Oil India, D-Street expert suggest four stocks ahead of Modi 3.0’s first Union Budget

The government may also increase the PLI rate to include big employment-generating sectors and keep the 15 per cent tax rate in place for new manufacturing businesses. With the government keen on continuing its reforms, we expect the dominant trend of domestic cyclical doing well to continue. These include defence, railways, power, capital goods, industrials, infrastructure, manufacturing, and real estate.
 

2. Amid the ongoing Q1FY25 earnings season, which sectors are you most positive about, especially ahead of the budget session?

While the consensus estimates for the next two years of S&P BSE 500 aggregate earnings stand at close to 15 per cent CAGR, Q1FY25 is expected to report single-digit earnings growth. Over the next two years, we expect domestic cyclicals to gain further share in the overall profit pools. 

Sectors like real estate, EMS, telecom, retail, metals, infra, capital goods, defence, railways, and power are expected to deliver over 20 per cent CAGR earnings growth (Source: Bloomberg). These sectors enjoy the focus of the government and adequate allocations and orders as well.

Also Read: Sensex @80K: Power Grid to UltraTech Cement — 13 stocks outperformed Sensex in H12024; Check full list

Few of these sectors have delivered robust earnings in the last few quarters and have also been rewarded by the markets. As they say, a high tide lifts all boats. While the outlook at a sectoral level remains buoyant, one needs to exercise prudence and not get carried away in the euphoria, especially in areas where growth visibility is lacking.
 

3.What should be the Budget-day trading strategy for investors on July 23?

A bull market is characterized by intermittent sharp corrections, which are swift and also result in swift recovery. Such opportunities keep presenting themselves. We witnessed such opportunities during the Israel-Hamas war in October 2023, corrections in February – March 2024 and most recently on election result day (June 04, 2024).

We are positive on companies and sectors where earnings are expected to remain strong. In the budget, the strategy should be to look for announcements that further strengthen these growth prospects. In short, here is what an investor may consider as a Trading Strategy on Budget Day:

1. Avoid knee-jerk reactions: Investors should avoid making immediate trading decisions based on budget headlines. Instead, they should wait for a detailed analysis of the budget's impact.

2. Focus on fundamentals: Concentrate on fundamentally strong stocks that are likely to benefit from long-term policy changes.

3. Diversification: Maintain a diversified portfolio to mitigate risks associated with sector-specific volatility.

4. Monitor key announcements: Pay attention to key announcements related to taxation, infrastructure, and social welfare schemes.
 

4. How should traders approach defensive stocks such as FMCG, which have witnessed a major erosion in stock prices on a half-yearly/annual basis but surge when the frontline indices crash? Do they present a buying opportunity or should traders focus on PSUs and banks in 2024?

Defensive stocks like FMCG are safe havens during market volatility due to their stable demand and strong balance sheets. They rate highly on quality factors. During the previous decade, their low double-digit earnings growth was also cherished, as the overall market’s earnings growth was weak in the single digits, that too fraught with leverage issues, bankruptcy, etc.

In the current environment, while these defensive stocks are still expected to report double-digit earnings growth, the overall market is expected to report nearly 15 per cent earnings CAGR over the next two years. Hence, on a relative basis, they look like having slow growth. Also, due to their outperformance in the previous decade, their valuations are not cheap by any standard.

As a long-term investor, we are keener on sectors /stocks with higher earnings growth visibility in the current growth environment. For a trader, current low prices could present a buying opportunity, especially if there are indications of increased consumer spending and favourable budget policies.

Also Read: FMCG stocks to recover? Green shoots visible in rural demand; D-Street experts peg ‘hold’ for long-term, HUL is ‘buy’

The markets are seeing certain sectors grow nicely, and a few are struggling to match pace. Coincidentally, a few of the capex-oriented sectors are dominated by PSUs—defence and railways. In sectors like metals and telecom, the growth leaders are from the private sector only. The market is making that differentiation, and quite logically so. 

Ultimately, it boils down to higher growth visibility and certainty. In current times, the domestic cyclicals provide that visibility. But this is known to all, and hence, a lot of that could be in the price, too.

PSUs could benefit from government reforms and disinvestment plans. However, investors should be cautious of regulatory and political risks. The banking sector, particularly well-capitalized private banks, is expected to perform well with economic recovery and government support measures.
 

5. FPIs turned net buyers in June after market sentiment became stable as the Lok Sabha election jitters died down. What kind of activity by foreign investors do you anticipate with the US Presidential elections scheduled in November this year?

FPI holding in Indian markets had moved to a nearly 11-year low of about 18 per cent (Source: Bloomberg). India is a rare large economy with:
-Median age under 30;
-Nominal GDP growth in double digits;
-Corporate Earnings growth in double digits; and
-Corporate ROEs in double digits

It’s only a matter of time before FPIs resume their structural buying spree in India, which is swiftly moving towards a $5 trillion economy. The US Presidential elections in November 2024 could introduce volatility. Historically, FPIs tend to adopt a cautious approach during such periods. Especially after that event is over, we expect FPIs to buy Indian markets more aggressively.

Also Read: Budget 2024 | D-Street experts predict ‘heightened volatility’, suggest caution on profit-booking if Nifty hits 25K

With attractive valuations and growth prospects, India remains a favourable destination for FPIs. Continued reforms and a stable political environment will further attract foreign investments. We maintain that India's economic resilience and reformative measures continue to make it a preferred investment destination for foreign investors.
 

6. The Indian stock market has been outperforming EMs in the long run. Where do you think Sensex and Nifty 50 levels will reach by the end of 2024?

The Indian stock market has consistently outperformed other emerging markets (EMs) due to strong economic fundamentals, a robust corporate sector, and continuous reforms. India is in a sweet spot for the factors mentioned above. 

With nominal GDP growing in double digits and corporate earnings likely to grow at an annualized rate of about 14-15 per cent over the next few years, we would not be surprised if the key indices double from here too in the next 5-6 years and continue to outperform EMs (Source: Bloomberg).
 

7. What is your view on the state of the Indian economy and the RBI's policy stance? How do you see the inflation and growth trajectory panning out in 2024?

The outcomes of the 2024 election marked the beginning of a new age of coalition government, which calls for cooperation and consensus-building in the face of accelerating technological innovation. Even if PM Modi reigns with two coalition partners, he is projected to retain a sizable amount of power in Parliament. 

Also Read: RBI MPC Minutes: Food inflation ‘persistently high’, price stability bedrock for high growth; 5 key highlights

With a GDP growth of 8.2 percent in 2023–24, India outperformed forecasts. The Reserve Bank of India (RBI) raised its forecast for GDP growth in 2024–25 from 7 per cent to 7.2 per cent in light of the expectation that retail inflation would decline. Over the next five years, infrastructure investments are expected to reach $1.45 trillion at a CAGR of 15.3 per cent, according to Morgan Stanley.

The June 2024 RBI MPC meeting minutes continued to signal caution on the inflation trajectory. Given the headroom from resilient growth prospects, most members considered a wait-and-watch approach. CPI inflation in June 2024 increased to 5.1 per cent due to a spike in vegetable prices. FY25 average CPI inflation is estimated at around 4.5 per cent. With the US now reporting one -year low inflation at three per cent YoY, the Fed may cut rates as early as September 2024, while India may be able to cut rates a few months later.
 

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 taking any investment decisions.