As the big B-Day approached, Indian markets began the week on a positive note. D-street did extend this rally, owing to the non-populist and capex-focused budget. However, this bullish momentum witnessed early in the week could be attributed to a secular improvement in global market sentiments more than the budget.
This can also be inferred from the fact that the Union Budget’s effect on short-term market performance has been shrinking, with Budget Day volatility hovering at 9% in 2022, compared to approximately 18.7% in 2010.
Although the budget’s short-term impact on the broader markets has been waning, it does provide a foundation for determining which parts of the economy are likely to gain in the medium to long term perspective and presents an opportunity to structure one’s portfolio accordingly.
This time, the sectors that are anticipated to outpace the others from the budget standpoint include the infrastructure sector, due to the government’s continuous focus on developing world-class modern infrastructure including highways, railways, mass transport ways and logistic parks. This is likely to boost the pipeline of orders for listed contractors and infrastructure developers, as well as capital goods, cement, logistics, and commercial vehicle firms.
Moreover, the companies involved in the electric vehicle space will flourish as a result of the government’s initiative to enhance the efficiency of the EV ecosystem. In addition, plays on affordable housing, such as home financing firms and mass-market building material companies, would benefit significantly given the government’s continued thrust on affordable housing.
Accordingly, investors can position their portfolios to include stocks of strong companies from the sectors that will be positively influenced by the budget.
The 10-year government bond yield in India shot up to nearly 6.9%, its highest level in two years, as investors became jittery by the higher-than-expected net borrowings considered in the budget. Further, the absence of budget announcements in respect of easing India’s inclusion in the global bond index also exacerbated bond demand concerns.
These factors, together with the tightening of global liquidity, contributed to the bond selloff. A substantial increase in long-term sovereign bond yields will raise borrowing costs for the rest of the economy as well.
If yields continue to climb, the RBI may have to intervene as a bond buyer to dampen the effect, putting the RBI in a tough spot since bond purchases would call into question the gradual policy normalisation underway.
Nifty50, driven by budget and global sentiments, rallied during the first half and closed the week on a positive note. However, the index is facing resistance around its 20 day EMA and now seems to be forming a lower top.
On the contrary, the BankNifty index has made a higher high and is exhibiting a bullish undertone due to recent outperformance in the PSU banks. As long as the Nifty index does not break below 16,850, it is more likely that the lower top formed on the daily chart may end up being a minor decline. Considering these factors we suggest traders to maintain a neutral to a mildly bullish outlook for the coming week. Immediate resistance on the higher side is placed at 17,800 levels.
The MPC meeting of the RBI will be a key event for the markets to watch. Unlike its global peers, RBI has been behind the curve and has been downplaying inflation risks. With increased government borrowing announced in the budget, rising global inflation, and a lag in private consumption and investment, D-Street will keep a close eye on the future outlook of monetary policy.
On the global front, markets continue to remain choppy, and investors will be looking for clues from US inflation data to help them determine their next move. In the midst of rising volatility, investors can continue to accumulate quality stocks in a SIP format. The Nifty50 closed the week at 17,516 up by 2.42%.
(The article is written by Ms. Yesha Shah, Head of Equity Research, Samco Securities. Views are personal).
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