Dalal Street Voice: Budget 2022 likely to focus on job generation & sustained economic recovery: Niraj Kumar of Future Generali Life Insurance

Budget 2022 is likely to have demand generation, job creation, and sustained economic recovery as its key focal points, Niraj Kumar, Chief Investment Officer at Future Generali India Life Insurance Company Ltd – said in an interview with Zeebiz’s Kshitij Anand.

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Niraj has close to 20 years of professional experience in the area of fund management and macroeconomics. Over the years, he has built expertise in the areas of portfolio management across Equity & Fixed income assets, Equity Analysis, Credit Risk, and Macroeconomic.

Q) Omicron, US Fed taper fear infuses volatility in markets. Where do you see markets in the next 12 months or so?

A) The advent of the new variant Omicron has no doubt kept the markets on tenterhooks with a feeling of Déjà vu, but the jury is yet to be out in terms of the severity of the virus.

Thus, while global economies will follow the policy of ‘Being Safe than Sorry’, we reckon the restrictions to be milder if the impact of the virus pans out to be less severe than what is presaged.

While fear of the spread of the Omicron variant in conjunction with Fed tapering may impart some volatility in the markets, we believe tapering is likely to be calibrated.

While there will be some impact on emerging markets as is evident in the recent FII outflow, the strength of the global economic growth is likely to keep markets strong.

Besides, India is relatively better insulated this time around on the macro front in terms of structurally lower inflation, robust growth, comfortable CAD, high forex reserves, etc.

Further, while an increase in global and domestic bond yields over the ensuing months could provide some headwinds to equity markets, India’s strong economic and earnings recovery coupled with a multi-year investment cycle is expected to provide tailwinds at the same time.

A blend of healthy capital expenditure, PLI schemes, and privatisation/strategic divestment of PSUs could lay a strong growth conducive platform for sustained long-term economic growth for India.

With tightening of liquidity, we may see the impact on the valuations of some new-age technology companies which are trading at incumbent high valuations, but they form a minuscule part of the Indian market vis-à-vis global peers.

Overall, we would expect market to go into a consolidation phase before the next move, which would be driven by domestic investment and consumption.

Q) The Budget 2022 is also a few months away. What are your expectations from the Budget? Do you think it will be a populist one that could hurt the fiscal math of the government which is already strained due to COVID?

A) Against the backdrop of a historic and Progressive Growth-Oriented Budget in 2021, the FY22 Budget would assume greater significance, as the baton of a sustained 7% growth path in the post-pandemic era still lies on the fiscal policy of the Government, as the monetary policy is treading towards tightening.

However, fiscal prudence will be important as the 2022 budget will be presented against a backdrop of tighter global monetary policy and rising yields.

RBI will also need to begin normalizing monetary policy as growth conditions no longer warrant pandemic level policy settings. This implies that upward pressure on G-sec yields is likely in 2022.

Hence, the budget will need to strike a balance between growth supportive measures as well as fiscal prudence.

That said, possible inclusion in the global bond index would ease the funding pressures and enable the government to take a more gradual path towards fiscal consolidation.

We expect the budget 2022 to be pragmatic and investment-oriented with Capex and infrastructure spending likely to be the thrust areas, as has been the case in the past.

The focus will be on long-term growth enablers such as continuing focus on infrastructure, PLI scheme for manufacturing and national monetization pipeline along with continued support for privatization.

We expect measures for sectors that have borne the brunt of the Covid19 shock such as MSME’s and travel and hospitality. Budget 2022 is likely to have demand generation, job creation, and sustained economic recovery as its key focal points.

Q) Which sectors are likely to hog the limelight in Budget 2022?

A) In Budget 2022, we expect the government to focus on spending in integral sectors such as Agriculture, Infrastructure, Manufacturing, Green Energy, Healthcare; pandemic impacted sectors such as MSME’s, and contact intensive sectors such as travel and hospitality; and relief to lower-income households.

Growth reforms for achieving the long-term growth goals would continue to be the cornerstone of Budget 2022.

We believe India’s growth reforms and coordinated monetary and fiscal policy has laid the path for a growth conducive platform and India is well placed to paddle the growth cycle.

We expect consumption to bounce back strongly in 2022 as consumer sentiments revive as well as the inflationary pressure on input costs wanes off due to easing of supply constraints.

Further, we expect both public and private capex to be strong. Finally, a combination of these two should result in strong rebound for bank credit growth as well.

Given this backdrop, we reckon domestic cyclical sectors should outperform the traditionally defensive sectors.

We believe sectors such as Banking & financials, Metals & Mining, Capital Goods, Infrastructure, Cement, and Autos, etc. which will be the direct beneficiaries of the cyclical upswing in the economy will hog the limelight in 2022.

Besides, sectors that are the prime beneficiaries of the Government's policy reform thrust (PLI & PSU divestments), should do well going forward.

Telecom is one sector that is attractive as its gradually moving to Duopoly with tremendous pricing power in hands of incumbent players. 

Q) The year 2021 will also go down as a year of IPOs when many niche or new-age businesses got listed. How do you sum up 2021 in terms of primary markets and your outlook for 2022?

A) 2021 has seen a strong euphoria in the primary markets as ample global liquidity available at lower costs coupled with the stellar bullish performance of the secondary markets served as a perfect recipe for successful IPO performance.

It has indeed been an interesting year from the perspective of IPO’s as investors wrapped their heads around valuing businesses that present significant long-term opportunities, despite the fact that they may not be making profits currently.

We believe that the listing of such companies is great news for investors as some of the future winners will emerge from the new-age companies and hence provide the investor to partake in the long-term wealth creation process.

2022 promises to be an interesting year for IPO as well where we may see the largest IPO ever in the form of LIC of India.

This may bring in a completely new set of investors to the market which will be good news in broad basing market participation. However, with the deluge of liquidity from retail investors and global liquidity from central banks being slowly mopped, there is likely to be differentiation based on quality.

As markets consolidate going forward -- the focus of investors is likely to move towards investing in IPOs of companies with strong fundamentals and quality at reasonable valuations.

Q) The year 2021 was a volatile year but bulls managed to remain in control. How do you look at 2021 – key highlights which stand out from a market, fund or business perspective?

A) Firstly, 2021 was indeed a year that exemplified the resilience of Indian markets wherein corporates posted a strong show despite adverse circumstances posed by COVID and investors continued to take that leap of faith in equities.

Although 2021 saw a strong rebound for the markets, yet it was a very discerning market. What we have witnessed is not an indiscriminate buying across the board, but the market has been selective in preferring stocks and sectors which are more promising on future growth prospects and technology.

However, the key highlight has been the consistent and rising Retail investor participation in markets since the onset of the pandemic in 2020, which has driven the recovery in markets in the last 1.5 year.

The sharp spike in retail participation in markets and broad basing of the market has resulted in new set of investors coming to the market.

Equity mutual funds have witnessed good inflows testifies the strong confidence which investors have in stock markets and their willingness to invest substantially.

Q) FIIs remain mostly net sellers especially when it comes to the cash segment of Indian equity markets. How are FIIs looking at India in the light of sooner than expected tapering from the US Fed?

A) We believe that selling by FII is due to a multitude of factors like recent hawkish commentary by the US Fed Chair Jerome Powell, significant supply in the primary markets, valuation premium of Indian markets over other Emerging markets & significant outperformance of Indian markets versus other large EM’s like China, Korea, Brazil which has necessitated the reallocation of funds towards these markets.

Also, while prima facie, FII selling seems high in the secondary market, the net selling number is much lower when adjusted for investments in IPO, as FII’s have been actively participating in the primary markets.

Going forward, while US Fed tapering may have some impact on FII flows in India (& overall EM’s), Indian markets remains well supported by strong flows in Mutual funds, and DII’s and Retail direct participation.

Secondly, given that India’s long-term structural growth story appears promising, we believe that the current FII selling is just a near-term phenomenon & FII’s will continue to stay invested in Indian markets from a long-term perspective.

Q)  Any particular theme that remained in limelight in 2021 and could well remain relevant and in demand in 2022 as well and why?

A) Three themes have emerged in 2021 - energy transition, digital disruption, and manufacturing at scale. We expect them to remain relevant not just in 2022 but for the better part of this decade.

The energy transition is driven by increasing concern over climate change and the global race to achieve “net-zero” carbon footprint. We are witnessing increasing traction in sectors like Hydrogen, Renewables, and Electric Vehicles.

Similarly, the coronavirus has accelerated digital adoption and both disruptors and challengers are investing heavily in technology. This has been reflected in the significantly improved revenue visibility in technology services companies.
Lastly, we are seeing a decisive move to China +1 strategy by global supply chains, as a result of which India is coming out as a natural alternative.

This combined with the Production Linked Incentive (PLI) scheme announced by the Indian government would witness a renaissance in the Indian manufacturing arena.

Q)  What were your key learnings from markets in 2021 which investors should take note of?

A) We believe that the biggest learning from 2021 is that technology is changing faster than expectation and every business is getting disrupted. In the wake of this, it is important to identify companies that would be agile in adopting new technology and back them.

At the same time, there would be companies that would lag behind in digital adoption and would be potential value traps. Also, we would advise investors not to extrapolate the performance of the last 18 months into the future.

We have had a strong rally since the bottom in March 2020 with fairly low volatility. Investors should keep more reasonable returns expectations going forward.    

Q) What are the key risks that investors have to face in 2022?

A) As we know central banks across the globe have begun to claw back liquidity and thus tapering of asset purchases by global central banks may have some cascading impact on emerging economies including India in terms of flows.

The next key risk is the specter of rising inflation risk emanating from the unprecedented rise in commodity prices and Supply Chain disruptions.

If inflation persists on the higher side, Central banks do some premature withdrawal of monetary stimulus without preparing the markets, which in turn can have negative ramifications across asset classes.

Another risk would be one more round of severe virus pandemic, which could delay the nascent economic recovery and result in continued inflationary pressure.

Besides, given that incumbent market valuations are pricing in sustained economic recovery and consequent strong corporate profitability, any disappointment on the earnings front could hamper the overall positive sentiments.

Nonetheless, we believe the positive outlook for India’s long-term growth remains intact and that markets will continue to perform and we maintain our constructive bias on Equity as an asset class.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)