Written by Vikas Pershad, Portfolio Manager, Asian Equities, M&G Investments
The Indian equity market has been experiencing a turbulent period, marked by a mixed earnings season and heightened volatility following the recent budget announcement.
The divergence in sectoral performances has been stark, with some industries thriving on robust consumer demand, while others struggling with rising costs amid supply chain disruptions. After several quarters of a low-volatility environment, the recent months have seen increased market fluctuations, particularly in June and July. These dynamics have created a complex investment landscape, where understanding the impacts of fiscal policies and sector-specific challenges is crucial for making informed decisions.
Mixed Earnings Season: A Double-Edged Sword
The earnings season has been a tale of two stories for the Indian market. On one hand, some sectors have reported robust performance, driven by strong consumer demand and favourable macroeconomic conditions. On the other hand, certain industries have faced headwinds, including rising input costs and supply chain disruptions.
• Consumer Goods and IT: These sectors have shown resilience, with companies reporting solid earnings growth. The demand for technology services and consumer products remains strong, reflecting the underlying strength of the Indian economy. For instance, major IT firms have seen an uptick in new contracts and expansion of existing projects, driven by global digitization trends. Similarly, consumer goods companies have benefitted from festive season sales and increased rural demand.
• Consumer Staples: Despite some companies like Hindustan Unilever and Nestle showing disappointing results, there is evidence of a resilient Indian consumer. The broader definition of the sector, including airlines, hotels, and 2-wheelers, continues to report healthy earnings, indicating robust underlying demand.
• Manufacturing and Energy: These sectors have been under pressure due to increased raw material costs and logistical challenges. Companies in these industries have reported squeezed margins, highlighting the uneven impact of the current economic environment. The automotive sector, for example, has struggled with semiconductor shortages, affecting production and sales. Meanwhile, energy companies are grappling with fluctuating oil prices and policy shifts towards renewable energy.
Budget 2024: Implications for Market Volatility
The timing of the budget announcement has historically been a significant event for the Indian market, often leading to increased volatility. This year was no exception. The budget, announced last week, aimed to balance fiscal prudence with growth-oriented measures.
• Fiscal Deficit and Spending: The government’s focus on maintaining a controlled fiscal deficit while boosting spending in critical areas such as infrastructure and healthcare has been well-received. The fiscal deficit target was lowered to 4.9% of GDP for FY25, down from the previous 5.1%, aided by a record surplus transfer of 2.11 trillion rupees from the
Reserve Bank of India and robust tax revenues1. This approach is expected to support long-term economic growth without stoking inflationary pressures.
• Tax Reforms and Incentives: Changes in tax policies, particularly those aimed at stimulating investment and consumption, are likely to have a positive impact on market sentiment. The introduction of a digital asset tax and increased thresholds for individual tax exemptions are notable measures. Additionally, incentives for sectors such as renewable energy and digital infrastructure reflect a forward-looking approach, encouraging investment in future-ready industries.
Opportunities and Challenges
In light of the budget and ongoing earnings season, we believe certain sectors present both opportunities and challenges for investors.
Opportunities
• Infrastructure Development: Increased budget allocation for infrastructure projects is expected to drive growth in construction, cement, and related industries. This sector is poised for robust performance as the government prioritizes large-scale development projects. The allocation of INR 5.54 trillion for the Ministry of Road Transport and Highways and the expansion of the National Infrastructure Pipeline to 9,000 projects are key drivers2.
• Renewable Energy: With significant incentives for renewable energy projects, this sector is likely to attract substantial investment. Companies involved in solar, wind, and other green technologies stand to benefit from favourable policy support. The government’s commitment to achieving 500 GW of non-fossil fuel capacity by 2030 underscores the growth potential in this sector3.
Challenges
• Healthcare: While the budget has increased spending on healthcare, the sector faces challenges related to pricing pressures and regulatory changes. The allocation for the health sector saw a 13% increase, emphasizing pandemic preparedness and health infrastructure4. However, ongoing regulatory adjustments and pricing controls on pharmaceuticals could impact profitability.
• Traditional Energy: Despite some positive moves, traditional energy sectors like oil and gas continue to grapple with global price volatility and environmental concerns. The transition towards cleaner energy sources may pose long-term challenges. The ongoing global push for carbon neutrality and potential policy shifts towards reducing fossil fuel dependency add layers of uncertainty for this sector.
The Indian market stands at a critical juncture, with the recent budget providing a mix of opportunities and risks. As the earnings season unfolds, investors must navigate the dual impact of fiscal policies and sector-specific dynamics. Staying informed and agile will be key to capitalizing on the evolving market landscape.
1 Sources: Reuters, Business Today
2 Source: Business Standard
3 Source: India Ministry of New & Renewable Energy Year End Review 2023
4 Source: Business Today
