Arth-Samvaad - Feb '23

Budgets and Burnishings

“If tax payer money were limitless, then we wouldn’t need a budget at all.” ~ Betsy DeVos.

Despite the looming election year, the govt. stuck to a?pragmatic and continuity?in its annual ritual, the budget. We’ve been of the opinion in the last few years that the govt is slowly turning it into a non-event. This is good as it tinkers with less changes and also brings in?predictability/consistency?in the way we’re taxed, at all levels.?

The biggest changes came on the personal finance front from making the new tax regime more attractive with the limit of?tax-less slab increased to 7L. This makes a large number of individuals off from the tax limit on their incomes though the?forced savings is turning into voluntary, doubt how far that would be useful for human psychology.?

Another aspect is the tweak in the insurance planning and?the revoke of Sec 10(`10(D)), the tax-free nature of the maturity proceeds from the insurance companies is now capped to cumulative premium of 5L per year, effective from next financial year. We’ve been anticipating a change in this part of the taxation as it smoothens the process towards a Direct Tax Code (DTC) where most of the exemptions are withdrawn. The other reason why we’ve pushed some of the individuals to make hey while this option is available.?

The inflows into riskier assets have accelerated during the month as the inflation began to cool and the fed commentary took a dovish tone. Though, not completely out of woods, there’s a?greater consensus of rate cuts?within this year itself. The latest Fed comments on possible?disinflationary trends?also added fuel despite a rate increase of just 25bps. The quantum and possible future action seem to be in-line with the expectations of the street giving a fillip to risk-on trade even as bond yields began to cool.?

The headwinds however, still remain as we enter the?2nd year of the war?between Russia and Ukraine, the acceleration of the changing world order along with the trends of deglobalisation, dedollarisation and decarbonisation take clearer shape. The Chinese removal of zero-covid policy has?streamlined the supply chains?and for now the related discrepancies are more or less eased out. The energy fallout over the Russian fuel is also ironed out with?convoluted logic?and?working around the sanctions.?

The?easing of USD?after a scorching last year is a welcome drizzle for the rest of the currencies. This is also another reason for the turnaround in the performance of the riskier assets across the world. The deflationary trend might also play it?in favour of gold?even as central banks are increasing their allocation to the yellow shine.

What’s in it for you:

Equity:?A?welcome correction in Indian equities?came last month albeit in a different fashion. The short-seller’s report in the Adani group has caused a flutter in the second half of the month with the larger indices shedding a lot of flab. Though, we don’t want to comment on the merits of the report,?we don’t see a systematic risk?to the economy from all this saga. Even as there’re some valid issues raised by the report, some of the concerns are extrapolated and overblown. Anyways, the high valuations were waiting for a prick and this provided for the vent out.?

The deleverage of the Indian govt, corporate and banks only are adding weight to the next possible expansionary phase in the medium-term. While the budget laid out the roadmap for the coming year in a broad way, there are enough headwinds that could impact in the short-term. Hence we?persist with staggered approach?with buying on dips in the?value?theme.?

Debt:?Couple of months back, we hazarded a guess of approaching peak rates, we’re more or less reached there but still find enough troubles to call it a stable outlook. Though the?peak inflation is behind us, the longer than usual period of higher prices and so the?higher rates for longer?is still a possibility. The geopolitical arena is ripe with impending flashpoints that could destabilise all our bets and hence the caution.?

We’ve been an advocate of?dynamic bond funds?for the last few months, to higher riskier profiles, now is turning attractive for an allocation across portfolios. Also, a?fixed maturity funds?are preferred than roll-down strategies at this juncture as the former provide a better return outcome to earn mark-to-market gains over higher accruals.?

Crypto:?Silvergate Capital?shares plunged after the bank said the crypto industry’s meltdown triggered a run on deposits, prompting the company to sell assets at a steep-loss and fire 40% of its staff. Regulators have become wary if banks have developed unhealthy habits as they began crypto cleanse with the collapse of FTX.?

FTX group advisers have?found more than $5bn in cash or cryptoasets?that it may be able to sell to help repay creditors, per the lawyers told the court. SBF, the beleaguered founder of FTX pleaded not guilty to charges related to the collapse of the exchange, the trial is set to begin in October.?

Genesis Global Capital, a crypto currency lending unit of Digital Currency Group went?belly-up?amid liquidity crunch. The risk-on trade last month ensured there’s been a rally in crypto assets as m-cap of?Shiba Inc token is back over $7bn.