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This month, the equity markets have been highly volatile, depending upon the news flow at the time.
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Union Budget
The FY23 Union Budget focused on credible revenue projections, continued fiscal consolidation and clear capital expenditure (Rs. 7.5 tn - up 20% spending in the coming fiscal). The lift in the consumption cycle is now tied to a broad-based pick-up in economic activity - which the government is trying to engineer through a focus on investments. The fiscal deficit for the year is pegged at 6.4% of the GDP, which could go up if inflated oil prices continue.
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Russia Ukraine Tension
Tensions on the Ukraine Russia border, due to a building up of Russian troops, has been affecting the financial markets throughout the world. On 22nd February, Russia recognised 2 Separatist Areas as independent and entered Ukraine. Sanctions will hurt not only Russia, but global growth.
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Galloping Inflation
Inflation in the US has crossed 7%, and the Federal Reserve indicated that interest rate rises would be faster than previously envisaged. Consumer Price Index in India rose to 6.01%, which is on the outer limit of RBI's comfort zone. At the moment, the RBI is concentrating on growth, but that could change with persistent inflation. The Ukraine/Russia unrest is raising oil prices, and other commodities too are up, which could hurt corporate earnings growth.
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Fear of Federal Reserve Tightening
Taper tantrum refers to the 2013 collective reactionary panic that triggered a spike in the US Treasury yield when the Federal Reserve said it was putting a brake on the loose liquidity. In India, the combination of high foreign exchange reserves, sustained foreign direct investment and rising export earnings will provide an adequate buffer against possible global liquidity tapering, so we may not see a collapse in the stock market at that time.
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EQUITY MARKET
The current correction in the equity market is due to the Russia-Ukraine conflict, high oil prices and increasing bond yields. Further, the upcoming LIC IPO will suck out liquidity from the market. However, there are enough green shoots in the Corporate earnings - cues taken from Management Commentary, higher tax collections and the highest ever GST collection.
These events will trail behind us eventually and then attention would be on more persistent Inflation and the Federal Reserve tapering. However, India does have the following strong investment themes:
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- Big getting bigger, strong getting stronger
- Revival of Industrial Manufacturing and Private Sector Capex
- Export Opportunity in services, chemicals, pharma and autos
- Real Estate and Home Improvement growth cycle
- Digitization at every level
- Financialization growth - India's domestic equity is at 7% of Financial
Assets vs 30% average for Emerging Markets.
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Debt markets, too, were volatile. The Federal Reserve indicated that they would be raising interest rates faster than originally planned. In the Budget, the debt market was disappointed on 3 fronts:
- The estimated fiscal deficit number for the next year was larger than expected at 6.4%.
- The borrowing numbers are massive – Rs. 14.3 tn on a gross figure. There is a large demand gap for this. This excludes the States borrowing.
- Inclusion of India in the Bond Index is further delayed as the tax adjustment has not been made.
The yields went up immediately but cooled off when it became clear that there was no more borrowing this year.
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GOLD
Gold is an insurance policy against all the money printing that Governments do. It has stood the test of time - over 5000 years. Gold is having a good run now as inflation in the US has touched 7%, the highest level in 44 years - and yet interest rates are still low. In 1978, inflation was trading at 7% and gold was at US 375. In 2 years, US inflation hit 14.5%, interest rates were at 15% and gold was at US$ 850. In 2000, gold was back to US$ 400 and today, it is US$ 1800 and has outperformed the S&P 500. Governments are holding gold; big banks are holding gold - all as a hedge. Further it is a flight to safety in the current conflict. So, we do expect gold prices to continue to be strong.
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