The US dollar pared gains this week since markets did not get reassurance from the US President-elect on his tax cuts and spending plans – the main pillars of the Trumpflation trade. However, he reiterated his strong border position which is negative for India’s exporters, especially his focus this time on Pharma imports.
Markets will remain fixated on Trump’s presidential speech on 20th and the important signings he alluded to in the week thereafter. Note, he had promised to brand China a currency manipulator on his first day in office – a strike back cannot be ruled out. Even if his administration takes no action immediately, deteriorating US-China ties is already weighing on investment decisions globally.
Across the ‘pond’, Theresa May’s comments signaling a complete break from EU crashed the pound. Markets are coming to terms with a hard exit type scenario and the questions are shifting towards a smooth transition. May will outline her strategy for Brexit on 17th.
Back home, the GST council will return to the negotiation table on 16th. Dual control and jurisdiction at both high sea and with regard to IGST are pending issues. Recent data showing robust state government tax collections despite demonetization could soothe jawboning.
On the budget, the government can achieve current FRBM target (a reassessment is due) of 3% of GDP fiscal deficit and 16% growth in capex helped by continued strength in tax buoyancy.
From a focus perspective, this budget comes mid-way through the government’s tenure and right after demonetization, so it needs to:
Create jobs, and
Alleviate sectors impacted by demonetization
However, a few things have changed forever for union budgets. After monetary policy, it’s now the turn of fiscal policy in getting institutionalized. 14th finance commission and GST (run upto) have reduced the government’s discretion to set policy and direct funds. The only leeway it has is on direct taxes. Even here, only personal taxes can be altered since a glide path has already been set for corporate taxes.
Moreover, large tax sops right after demonetization is unlikely since it counters the objective of raising public revenue. Expect a conservative stance on projections since the outlook for growth revival remains uncertain. Spending capacity can always be reviewed later in the year based on the run rate of tax collections.
Q3 results: In such an uncertain domestic environment for this quarter, what stands out are the Oil and Metals sectors on the back of strong Brent prices (up 15% YoY), recovery in refining margins and metal price rebound.
We estimate earnings growth of 17% YoY for December quarter for 162 companies under our coverage (ex OMC) due to low base and negative earnings in large companies (BoB, BHEL, Hindalco, Vedanta, Tata Steel). Excluding PSU banks and these large companies, earnings is expected to grow at a meager 1% YoY, while aggregate revenue growth is seen at 5% YoY.
Meanwhile, demonization would negatively impact volumes in Auto, Cement, FMCG, Realty and Telecom. However, double digit growth is expected in Oil and Metals sector.
Tech results were a mixed bag with demand pressures in traditional service offerings. Protectionist policies remain an overhang. On the positive side, both TCS and Infosys stated BFSI vertical should stage better momentum.
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