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Budget 2022: Sowing the seeds of the virtuous investment cycle

Hello!👋 This week, we covered the Market snapshot, explained how the government has sown the seeds of a new virtuous investment cycle by focusing on Capex in Budget 2022, discussed what else is trending in markets followed by interesting chart & curated reads.

1. Market snapshot

Indian markets closed the week in green gaining 2.5%. The best performing sector was Commodities and Materials, aided by a weakening US Dollar. 

US Dollar Index (DXY) fell by 1.8% from 97.24 to 95.48 and historically this is seen as a positive sign for Emerging Markets. Since EM economies like India are reliant on dollar-issued debt, it lowers the cost of debt.

Since all commodities are bought and sold in dollars and traded worldwide, a weaker dollar means commodities are less expensive in other currencies – thus increasing demand.

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2. Budget 2022: Sowing the seeds of virtuous investment cycle🌱

Unlike past years budget with a long speech emphasizing on “reduction of deficit; providing free facilities; higher subsidies and major developments (last year) such as asset monetization, privatization, and labor reforms”, this year it’s different.

Focus shift to reviving growth 🎉

The focus shifted to “betting on country’s growth” by laying down a roadmap for Capex to be incurred for starting a new virtuous investment cycle…

An ~38% increase in the target of Infrastructure capital expenditure is announced (from Rs 5.5 Tn to Rs 7.5 Tn) while the fiscal deficit will slightly decrease from 6.9% to 6.4%. In FY21, Capex as a % of GDP breached the 2% level after a decade & is expected to reach 2.9%. 

Out of this Rs 2 Tn, 50% has been allocated for the loans to the state government &  the rest will be majorly allocated towards transport & defense infrastructure. 

But here comes a “Good problem”🙂

Currently, the government is facing a good problem of having surplus funds Rs 5.5 Tn as cash reserves with RBI (at peak, for context- this is usually at Rs ~0.5 Tn levels) &  surging tax revenues.

Having surplus money seems good, but it doesn’t seem great for the government as it has not been very good at spending money productively. For perspective- It spent Rs 1.5 Tn on Air India & it also will be infusing Rs 44,720 Crs in loss-making company BSNL this year😵‍

Ideally, more spending should be at the state level like on health, education & power distribution. But if we look at the gap between the state’s planned (intent) & the actual expenditure, it has widened during a pandemic i.e. state’s actual spending is far lower than the planned budget. 

So, the bottom line is: While the intent in Budget 2022 of focusing on the country’s long-term growth by using the surplus money & borrowings towards the infrastructure is outstanding, the ability & execution of this spending need to be monitored carefully. 

We compiled a list of potential winners and losers: 

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3. What else is trendin’?🤙🏻

✔️ Bond yields surged and Rupee fell: 10-year Indian government bond yields have reached 6.95% which is higher than a home loan rate of ~6.5% on average🤷‍♀️. This indicates a reaction to the inflationary environment (Monetary tightening) and due to this our currency depreciated. 

Not just in India, government bond yields have surged in the US, Germany, Europe as well. And one should not forget the enormous amount of high borrowing cost to be born by the US as its debt has reached 30 Trillion$ (which is a 43% increase since covid and ~3x increase since the last financial crisis)👀

✔️ Crazy volatility in US Tech companies: Share prices of companies such as Facebook (saw a bloodbath due to issues in ad targeting & engagement softening) Meta platforms, Paypal, Pinterest, Snapchat, Netflix, Twitter plunged and jumped back leading to crazy volatility in US markets. 

For context: Snapchat after plunging by 33%, increased by +60% in just a day!

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4. Chart of the week📊

Diversion between Growth vs Value price index🎌

It shows the Growth vs Value price index relative to S&P 500. A rising/ falling line indicates it is outperforming/ underperforming the index.

The chart indicates early signs of Growth stocks under-performing and Value stocks outperforming the S&P. We conducted a poll on Multipie which theme (Growth vs Value) in India will do better over the next 5 years – see the response here.

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5. Good reads📚

5.1 A write-up on “Art of selling stocks”- 7 reasons explained on when a stock should be sold. 

5.2 Building Resilience”- explaining how resilience is a superpower and it is something that can be developed. 

5.3 “Position-sizing”- How to construct portfolios that protect you. 

5.4 A write-up on “coping up with 2 conflicting realities

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6. Multipie Adda: Last week at Multipie 🔄

Some selected highlights: 

  • Our team compiled a list of companies that are nearing Capex completion. Check it here.
  • Why should you not rely on stock recommendations and targets in research reports? Here is Mihir explaining the same.
  • Abhishek compared some of the Indian banks, basis their RoE and Price to Book value. Want to see who is winning? Click here.
  • YouTube, Google’s sleeping giant, has a higher annual run rate ($34B) than Netflix ($30B). Tap here to see YouTube ad revenue vs Netflix’s total revenues for the last 11 quarters.
  • The Multipie community is gifting Amazon vouchers to its users, every time they get 5 referrals. Here are the winners.
  • Ending this piece with a meme. Check out the full meme thread here
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See you next week. Until then, happy investing!

Join us on Multipie if you haven’t yet by downloading the app by clicking here – for ios, android & web.

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