Mohit Nigam, Head – PMS, Hem Securities said Finance Minister Nirmala Sitharaman’s upcoming budget may focus on Capex stimulus and green energy. In this regard, many incentives can be observed in the manufacture of electric vehicles, solar energy and semiconductors.
In an interview with Zeebiz’s Kshitij Anand, Nigam said some announcements on the health and infrastructure sector could be the priorities for this year’s budget. Edited excerpts:
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Q) It was a volatile week for the Indian and Sensex markets, Nifty lost over 3%. What led to the price action?
A) Some of the factors that led to a correction in the markets are the fall in US equity markets (down for 5 straight sessions) the sharp rise in US bond yields which cause investors to shift their funds to less risky assets, investors foreign institutional (FII) sold in recent sessions, rising COVID cases and restrictions imposed by state governments.
In addition, third quarter results so far have indicated the pressure on operating margins that is impacting the company’s profitability.
Q) Small and mid caps also ended the week in the red – it looks like the high beta rally was halted ahead of the budget. What are your views?
A) The main reason for the current drop in small and mid caps can be attributed to global markets, as the losses in Indian markets reflect the fall in US equity markets as well as the sale of FII.
The market also anticipates a normalization of liquidity by RBI at the next monetary policy meeting. We expect the broader markets to continue to outperform the Nifty 50 in 2022 as well, as small and mid caps still do well when the economy improves.
Looking at the macro numbers, we can say that the economy will improve, earnings will improve, and small and mid cap growth will be seen as more important than large cap earnings growth.
Given that markets are more resilient and covid is no longer an unknown variable like it was last year, this drop may not last long and we can see positive momentum returning to the market, sustained by strong corporate earnings and supportive policies.
Q) What is causing the nervousness of FIIs that have been net sellers of Indian equities and will there be a change in trend as the budget approaches?
A) The continued selling of FII in the Indian markets was driven by the need to make profits amid rising inflation, resulting in a high bond yield. Ongoing geopolitical tensions and soaring oil prices also weighed on investor confidence.
This prompted FIIs to pull money off the table, while domestic investors stayed the course. There has been a massive increase in the total number of retail investors, indicating that Indian stocks are now overwhelmingly dominated by retail investors.
We think markets will be waiting for clarification on the actions taken by central banks around the world as well as the RBI. After many years of accommodative monetary policy and near-zero interest rates, most central banks are now looking to tighten liquidity and raise interest rates over the next few months.
Such a simultaneous withdrawal of monetary support can have a negative impact on market movement. However, we found that equities performed well, as most of the time rate hikes happen when economies recover.
Therefore, we believe that rising interest rates are not necessarily negative for equities. With the US Fed focusing more on CPI inflation and also doubling the cut to $30 billion per month, US Treasuries yields are expected to rise slightly going forward.
Therefore, the trend may not change immediately. However, over time, India is expected to see positive FII inflows, given the strength of domestic macro-economies and robust earnings growth prospects.
Q) This is an expiry week and a week before the 2022 budget announcements. What should be the strategy for investors on Nifty?
A) The market has seen strong selling recently and the previous week and the Budget 2022 main event is scheduled. The next trading sessions could be just as volatile.
The Nifty50 could see strong moves in either direction as profit booking and short hedging could intensify.
Turning to the options data, strong call writing is seen at the 17,900 and 18,000 levels indicating strong resistance for the week, while open interest for put options indicates support at 17,500 followed by 17,000.
We recommend a short strangle strategy where traders could write 17500 puts and 17800 calls for a total premium of around 155 per pair and to hedge risk buy 17350 puts and 17950 calls for a total premium of 85 per pair.
The maximum profit would be Rs. 3500 for the trade if Nifty ends the expiry week between 17500 and 17800.
Q) In your opinion, what actions will probably remain targeted before the budget? Budget choices investors can pay attention to and why?
A) Finance Minister Nirmala Sitharaman’s next budget could focus on the recovery of Capex and green energy. In this regard, many incentives can be observed in the manufacture of electric vehicles, solar energy and semiconductors.
Some announcements on the health and infrastructure sector could be the priorities of this year’s budget.
Some stocks investors should keep an eye on are:
There is multi-year revenue visibility from large order books and the government is expected to increase spending on road infrastructure in this year’s budget.
The company’s order execution capabilities, efficient use of capital and debt reduction make it a good long-term performer.
Tata Power and Tata Motors:
Renewable energy and electric vehicles could be a priority area in this year’s budget. The Prime Minister announced in Glasgow net zero carbon emissions by 2070. There may be announcements about that.
India has witnessed a revolution in the telecom sector over the past seven years which is expected to continue in the coming years.
The government’s drive to bring 5G technology to India as soon as possible will give the company a good boost. The price of data per gigabyte has dropped from Rs. 200 in 2014 to Rs. 10 in recent years.
Paras Defense and MTAR:
An increased partnership with private actors in the defense sector has led to a substantial increase in the defense budget. For the first time, India is on the list of defense equipment exporting countries, currently exporting to more than 84 countries.
This year’s budget could focus on increased collaboration of government agencies with private actors to boost defense exports and the transformation of R&D to drive innovation.
(Disclaimer: Opinions/suggestions/advice expressed here in this article are investment experts only. Zee Business suggests its readers consult their investment advisors before making any financial decisions.)