The government has focused on creating a good macroeconomic environment in the form of low current account deficit, reasonable fiscal deficit and thereby, keeping a control on interest rates. The Budget has set in motion places where money comes into assets which are much more productive and positive for the economy like equities and fixed income, and doesn’t flow into physical assets like gold and real estate, where incremental capital output ratio is not high. This focus is very positive for the mutual fund industry and we could not have a better budget from the point of view of the mutual fund industry and investor.
As a means to discourage incremental investments into physical assets, especially real estate, in this budget, the finance minister has brought about a change in the tax benefits extended to house property. This step is likely to drive people away from real estate. When it comes to gold, the yellow metal has hardly delivered any returns in Rupee terms. Before this, gold returns were a factor of the rupee-dollar exchange rates. Now with the country’s current account deficit under control, the exchange rate is likely to remain well-balanced. Hence, gold is not really likely to be a favourable asset class with investors.
Given these circumstances, we expect the flows into the capital markets and other financial assets to remain robust in the near and medium term. The reduction in income tax in the lowest tax bracket is another move which will enhance savings in the hands of people. This will also positively help the capital markets. Overall, we expect corporate earnings to steadily increase over the next two years.
Budget 2017 provides the impetus for further growth in equity valuations. With the inflows into financial savings set to rise because of the broader budget moves, the market’s price-to-earnings looks to get re-rated. Hence, investors should keep investing in financial assets regularly.
In terms of themes, we are highly positive on the infrastructure sector. The rural focus and increase in spending on infrastructure is a positive outcome. Giving infrastructure status to affordable housing is also a welcome move. We expect this sector to do well over the next two years. The government’s support to this sector with its intent to improve the country’s infrastructure is positive. This sector has been an underperformer for many years and investors will benefit due to current low valuations. Savvy investors can take exposure to this theme via infrastructure dedicated funds.
Another interesting theme that long term investors can currently consider is information technology (IT), which is poised to offer good risk-adjusted returns. Many of the names in this space are available at low valuation as the sector is currently facing some challenging times given the US political scenario.
(The writer is MD & CEO, ICICI Prudential AMC)
