Stepping stones in place to invest in cyclical sectors

With the Indian economy looking to recover from a global pandemic, Finance Minister Nirmala Sitharaman has delivered an unparalleled Budget that is pro-growth and development.We had this view that India had the potential to deliver a pro-growth budget in many years, and this was a perfect time to deliver on that. India does not have the problem of fiscal sustainability because it has better demographics with good growth potential. Once you decide to put growth in fourth gear, even if the rest of the world slows down, Indian growth has sustainability that is far better than in any other part in the world.Given that growth suffered significantly in 2020 due to covid-19, the finance minister’s accelerated spending has kept a high level of fiscal support for FY22. This, we believe, will support growth and take it to a high level.This is one of the reasons the budget has been well-received by the markets. The government’s expenditure is higher than what was initially expected, but that should be seen as a positive. Higher spends from the budget are primarily toward capital expenditures, which are up 26% year-on-year. This is phenomenal.One test that could come towards the end of 2021 is when inflation begins to inch up in many countries across the world. We may see some risks coming up then, but that seems still some distance away. The other risk is oil. If oil prices rise, then inflation can be an issue for India. But, as long as we have oil under control, the macros should be quite fine even on the inflation front. There is a fair amount of unutilised capacity in India, which can lead to huge productivity gains in the near term. That is good for equities.Over the next few years, the stepping stones have been laid for investing in pro-growth and cyclical sectors. In the domestic side, consumer durables, banking, auto, capital goods and infrastructure sectors are poised to receive huge benefits from the pro-growth budget. Global cyclicals such as metals and mining, and even oil are in a better shape and look attractive. Maybe, the markets are not as cheap as they were during the 2003-2005 period, and we are in an environment where some quality stocks are expensive. Hence, the quality side of the market may not deliver as much as the cyclical side of the economy, and it has played out exactly as we thought it would.One of the important things people have to remember is that people investing in debt have to either accept the lower returns they will get, or choose asset allocation products, which is the best way to look in this part of the cycle. We have been of the view for some time that defensive investing in duration and debt funds may be over, and the budget was in-line with our view. It is quite satisfying that the budget is supportive of our stance. For a developing nation like India, this is the most pro-growth oriented Budget seen over the last decade.

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