The budget has provided a modest impetus to the Indian economy with 12% growth in capital expenditure over FY2026RE and a modest 7% growth in revenue expenditure.
The budget has focused on sector-specific initiatives with additional funds for strategic sectors such as AI, biopharmaceuticals, component manufacturing and defence. The increase in the securities transaction tax (STT) on equity derivatives may be a negative from a sentiment perspective for the market and the large divestment target of ₹80,000 crore may act as an overhang for ‘narrative’ public sector undertaking stocks. The change in taxation on buybacks is incrementally positive.
The Indian stock market may stay range-bound over the next few months. It is stuck between positives and negatives. The positives are stabilising earnings after two years of large downgrades and a better earnings outlook; we expect 17% growth in the net profits of the Nifty-50 Index. The negatives are high valuations across most sectors and stocks, low interest among foreign portfolio investors given cheaper valuations and ‘better’ opportunities elsewhere, lack of high-tech companies in India and possible de-rating in multiples of consumption, investment and outsourcing stocks given the large disconnect between their valuations and fundamentals and their seeming lack of preparation against ongoing and oncoming disruption threats. This push-and-pull between stronger earnings visibility and valuation constraints is likely to keep index-level moves contained in the near term.
The process of de-rating may have already commenced with several large-cap companies seeing time correction for the past 3-5 years and many companies irrespective of size seeing significant price erosion in the past few weeks.
Accordingly, equity investors should moderate their returns expectations to mid-to-high single digits for the next few years, with moderate growth in earnings being likely offset by lower multiples for most parts of the market.
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Also, investors should focus on steady investment returns over time and resist the allure of rapid movement in asset prices. The extreme price movements in asset classes in recent months reflect rampant greed, risk-taking and speculation at a time when economic, geopolitical, social and technological risks have increased dramatically.
Among sectors, we prefer (1) financials given improving earnings outlook and reasonable valuations, (2) domestic services sectors such as healthcare services, hospitality, retailing (selectively) and transportation due to their strong medium-term growth prospects, no threat of global competition and a large unorganised segment and (3) capital goods, specifically companies with global competencies.
