What should be your stock market strategy ahead of the budget?

Union Budget 2024 will be presented by Finance Minister Nirmala Sitharaman in the Lok Sabha on July 23. Like all previous full-year Budgets, the wish list is long. Infrastructure is expected to get continued support, along with manufacturing, affordable housing, healthcare and energy transition.

This time around, some measures could also be taken to alleviate the financial distress of farmers, support the rural economy and boost employment at large, especially after the election results—all this, fine-tuned with a realistic fiscal consolidation target. The salaried class, too, is anticipating some sops in the form of either relief on the tax slabs or higher section 80C deductions.

In the middle of all this, there are several questions in investors’ minds:

-Will the next set of gainers come from the consumption sector?

-Should one book profit from infra-related themes?

-Is it time to consider defensive plays or opt for wait-and-watch mode ahead of the Budget?

To answer this, one should first go back to the recent Lok Sabha election results, the Interim Budget and the history of the NDA government, which will present its first Budget of the third term. Although the stock markets cracked 5-6% on June 4 after the election results, they recovered strongly. The buzzword was political stability. The BJP could not cross the magical mark of 272, but it managed to retain power for the third time, with the help of two allies, keeping key ministerial profiles for itself. Markets welcomed this.

In the upcoming Budget, some populist measures targeted towards rural distress are expected; and rightly so. Therefore, some indirect boost to consumption is likely. But it may not cause any major cuts in the capex drive, especially when private capex is at a nascent stage and is slow in gathering pace.

To recall, Finance Minister Nirmala Sitharaman's Interim Budget speech talked about ‘Viksit Bharat’, with modern infrastructure, providing opportunities for all. She also talked about ‘garib’ (poor), ‘mahilayen’ (women), ‘yuva’ (youth) and ‘annadata’ (farmers), saying their needs, their aspirations, and their welfare are her government's highest priority.

In the Interim Budget, ahead of the Lok Sabha election results, Sitharaman proposed to increase the capital expenditure target by over 11% to ₹11.11 lakh crore for FY25. On the other hand, subsidy allocations were proposed to be raised to ₹4.1 lakh crore for the fiscal.

In the past, the NDA government chose to walk the fiscal prudence path. Thanks to the recent higher-than-expected RBI dividend, this time around, it should be able to increase spending while keeping the fiscal deficit within guided targets.

What should be an investor’s strategy?

While the forthcoming Budget can cheer or disappoint a few sectors, eventually stock prices are slaves to earnings in the long term. India is enjoying a historically high premium over emerging market peers because of its strong macros, fiscal prudence, and one of the highest growth rates among major economies. India Inc. fared well on the earnings front in FY24, which was appreciated by the markets.

Following the recent rally, a few sectors look rich in terms of valuations. Either their earnings have to catch up or some consolidation looks imminent in such sectors or stocks. Meanwhile, some sectors and stocks did not participate in the recent rally and thus could be delved into for value. A shift has been visible. Financials and IT stocks have recently gathered momentum while midcap and smallcap stocks from several sectors have seen some correction. More than the Budget, the ongoing earnings season that started on July 11 is also in focus.

Lastly, the very fact that the government has taken some extra time (the post-election Budget usually comes in the first week of July) to prepare the Budget document despite no leadership change in the finance ministry suggests that some pro-citizen measures could well be in the offing to make up for the less favourable election outcome of June. All eyes are on July 23.