2020 GLOBAL STOCKS MELTDOWN ~ AN OPPORTUNITY ?

Cash     Courage    Conviction

Correction was long overdue in Global Stock Markets .In previous editions we’ve spelled out the disconnect between rising Stock Indices and declining Economies on the strength of Liquidity Flows .COVID-19 introduced the correction globally in Stocks across Continents right from the start of 2020 with Capitulation seen last week before a stunning pullback.Yet Global Indices are in the red in 2020 with South America, Europe, Japan and Thailand plunging the most. Quite interestingly China, where the Corona Virus COVID-19 originated, has seen its Indices barely drop because it closed its markets early in 2020 and restricted short selling on re-opening on February 3,2020. In fact SZSE is in the green!

Here’s how Global Indices fared in 2020 till date

In our view markets will continue to still seek lower levels in the coming months with intermittent pullbacks as we saw on Friday. It is difficult to call the bottom as it’s difficult to call the duration, spread  and intensity of COVID-19.But it’s easy to call ,based on historic evidence, that after this crisis passes and after any US & Global Recession the bounce back in Equities will be significant in the years ahead. These declines are introducing some sanity back on Valuations on the bourses and give some great opportunities in value buying for the long term. India also is in a relatively sweeter spot on the recent Saudi Arabia’s Oil Shock plunging Oil prices lower and which we expect to stay lower all of 2020.We lucidly explained this in the previous edition

Major Spoilers for any recovery later in 2020 could be that the COVID-19 crisis prolongs late into 2020 and hopefully not into 2021 and Geo Political Conflicts will intensify across global hotspots in the Middle East and Asia as economic stress pushes Nations to the wall.

We would strongly recommend an Asset Allocation exercise in sync with your Risk Profile to :

• Those with Direct Equity in their Portfolios to review to take a decision if warranted on repositioning in stronger selections that are now available at much lower prices even if it involves taking a loss on some existing selections and even consider infusing more into Equity gradually
• Those with no exposure in Direct Equity ,it’s a great time to consider initiating an exposure

Cash, Courage, Conviction all three are being called for here. In 2020 it calls for Vision and History supports here. On Hindsight with a 20/20 Vision in 2022 and 2023  you should be smiling in your Direct Equity Portfolio

If you’re on our Fundamental Wavelength here, do connect to take advantage

Disclosure & Disclaimer

Jeena Scriptech Alpha Advisors Pvt Ltd (JSAAPL) is a SEBI Registered Entity offering Fundamental Direct Equity Research Analysis, Equity Portfolio Advisory, Training & Mentoring Services in Capital Markets

This Report is under our free access SCRIP STANDPOINT Module.It is for the personal information of the recipient/reader. We are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. It is our Viewpoint for general information purposes only. It does not take into account the particular investment objectives, financial situations, or needs of individuals & other entities .We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither JSAAPL, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. No part of this material may be duplicated in any form and/or redistributed without JSAAPL’s prior written consent.

In case you require any clarification or have any concern, kindly write to us at: [email protected]

UNION BUDGET 2020

 S(LAYING) THE ECONOMIC FOUNDATION

Disconnect    |    Deficit    |    Debt    |    Disinvestment   |     Dividend    |    Dispute

 deduce  ~ reach a conclusion by thinking about the information or evidence that is available

deconstruct ~ reduce something to it’s basic elements  in order to interpret it in a different way

Here’s the flow of how we have deconstructed and deduced the Union Budget 2020 for you with a focus on the ‘D’s as above offering you a perspective on each supported by government statistics on record .This a Three Part Scrip Standpoint , each of which is being send separately to reinforce the content.This is PART II on Deficit and Debt

PART I    ~ DISCONNECT ~Declining Economic Growth vs Rising Record Sensex

PART II  ~ DEFICIT  AND DEBT ~ Dancing with Deficit and are Sovereign Bonds the Solution?

PART III ~ DISINVESTMENT ~ (Dis)Comfort with Complacency of a High LIC Valuation

DIVIDEND DISTRIBUTION TAX ~ Reverting to taxing the Recipient

DISPUTE ~ Vivad se Vishwas Scheme ~ One Time Offer for resolving Direct Tax Disputes

PART II

DEFICIT and DEBT

DANCING WITH DEFICIT

Source : Budget Documents

The Fiscal Deficit is shown at 3.8% of GDP in FY 20 and marginally lower at 3.5% for FY 21. The Fiscal Deficit in FY 20 from an initial targeted  Rs 7,03,760 crs has now been increased by a net Rs 63,086 crs to  Rs 7,66,846 crs

The Finance Minister, Mrs Nirmala Sitharaman by keeping this ratio at 3.8%  has :

1. invoked the escape clause in the Fiscal Responsibility and Budget Management Act (FRBM) that allows a maximum upward deviation of 0.5 %
2. addressed the risk of potential sovereign debt downgrade given the plan to increase Sovereign Debt

The Reality is that there is a huge Deficit in disclosing the real Fiscal Deficit. As the table below shows ,just the shortfall in both  Corporate Tax and Disinvestment Receipts would have taken the Fiscal Deficit to 4.4% of GDP.The actual Fiscal Deficit is actually significantly much more than even this on account of off budget financing sources that the government has resorted to.

So how has the Government been able to keep the Fiscal Deficit at 3.8% of the GDP ?

We are not questioning the sanctity of the revised Total Tax Revenues Estimates for ongoing FY 20 even though there is growing concern that the government is optimistic on these and that there will be shortfall in the collection .One of the reasons we are not doubting these is the new ‘one time’ Settlement opportunity for disputed Direct Taxes being offered through a new ‘Vivad se Viswas’ Scheme that the government has announced in this Budget.More on this in Part III in a separate note that will follow

So we look at the Expenditure Side

Government clearly has benefited in a lower Interest Outgo than originally budgeted for ,in part due to falling interest rates.Interest Outgo is significantly reduced by Rs 35366 crs

Then in clearly what appears to be a deliberate balancing act to reduce the Fiscal Deficit, the Government has slashed the  expenditure on Central Sector Schemes and Projects chiefly on Food Subsidies

Of Which

Thus the Budget Balancing Fiscal Deficit Maths becomes clearer

Two thoughts cross our mind on this Dancing with the Deficit to balance the Budget to keep it at 3.8% of GDP

2. A Former Finance Minister ,Mr P Chidambaram ,in the UPA government had done a similar slashing of Expenditure in his FY 13 Union Budget just to show the Fiscal Deficit at lower than it actually should be.Yet it was as high as 5.2% of the GDP. He knocked off a whopping Rs 92,000 crs by reducing Plan Expenditure Estimates from the original estimates of Rs 5,21,000 crs to a revised Rs 4,29,000 crs! This begs a question that most Government Plans and Projects are never really fully expended or else there would be no huge cushion for such cuts !
3. What was the need to reward the Corporate Sector on September 19,2019 when our FM Minister, Mrs Nirmala Sitharaman announced, what should be seen as a forced measure, a Tax Bonanza for Corporates busting the Tax Rate from an effective high of 34.94% for most to an effective 25.168% .Government Sacrifice is Rs 1,45,000 crs or US $ 20 Billion in Corporate Tax Revenues .It’s like the Government conceding to the Corporate Sector ” Hey Guys ! we’re transferring our Revenues to you as you’ll can put it to more productive use by funding an Investment Capex Cycle to stimulate more growth for better returns than we can through increased Government Spending ”  .Our September 24,2019 Scrip Standpoint was on this and in our opinion this was a forced measure simply to boost stock markets

Given the current economic scenario of the country and it’s near stagflation condition where Demand appears to decline or stay stagnant despite  rising inflation and monetary or fiscal growth stimulus measures that have been announced (Repeated Repo Rate Cuts have not transmitted into higher credit offtake) the government was in no position to announce such a Corporate Tax Rate Cut even though this was a committed plan from 2014 when NDA came into power at the Centre.It should have been deferred to a few years down the road once Economy revives on a higher Growth track.Remember this will be an annual sacrifice of Corporate Tax Revenues with a hope that in due course Tax Buoyancy will result to compensate

Rajiv Kumar of Niti Aayog had opined in September 2019 that the Government will make up this loss of Corporate Tax Revenues through higher Non-Tax Revenues in FY 20..He clearly was referring to  Disinvestment and RBI Transfers to the Government .Though the Disinvestment Target of Rs 1,05,000 crs in FY 20 has been revised down to Rs 65,000 crs  the target for FY 21 has been raised to the highest ever at Rs 2,10,000 crs. Look out for our Part III in a separate note for more on Disinvestment.There has been an unprecedented transfer of Rs 1,76,051 crs or US $ 25 Billion that RBI was induced to make to the Government post Budget in August 2019 of which a portion is out of RBI Reserves of earlier years & which has not been considered in the Budget Exercise. The transfer includes Rs 1,23,414 crs of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised economic capital framework.

Here’s the Trend of Direct Tax Revenues from FY 15 when the NDA first came to power under Prime Minister Mr Narendra Modi. Clearly this second NDA Term shows the path forward where Income Tax and Corporate Tax Revenues are converging, singularly due to this huge Corporate Tax Rate cut announced in September 2019        

In Rs Crs

DEBT ~ ARE SOVEREIGN BONDS THE SOLUTION?

Here’s the Total Government Outstanding Debt Estimates

Source : Budget Documents  

Here’s the Total Government  and Non Government External Debt as on September 30,2019

Here’s the External Debt to GDP and FX Reserves to External Debt

Are Sovereign Bonds the Solution ?

The US $ 106.9 Billion Sovereign Bonds External Debt as on September 30,2019 is :

• 7 % of revised estimates of FY 20 GDP of US $ 2.86 Trillion at current Exchange rate @ US $ = Rs 71.50
• 6% of Total Government Outstanding Debt estimates of US $ 1401 Billion for FY 20 excluding the US $ 70. 8 Billion shown as Govt external debt under external assistance
• 75 % of assumed Total Government and Non Government External Debt of US $ 570 Billion end FY 20

Current Government thinking, advocated even by it’s Chief Economic Advisor (CEA), K Subramanian,is to increase the Sovereign Borrowing for funding Infrastructure given that currently the Sovereign Debt is at under 5 % of GDP

The Union Budget 2020 has announced incentives to attract Sovereign Wealth Fund Investments with a minimum lock in for three years by offering 100% Tax Exemptions for Interest, Dividends and Capital Gains for such Investments if made in Infrastructure and notified sectors before March 31,2024

In 2019 the CEA had expressed his view that India would be at an advantage in future repayments of such Sovereign Debt in foreign currencies as in his view the Rupee would appreciate thus creating a lower liability on both principal and interest.

History of the Indian Rupee does not support this optimism and there is a clear Exchange Rate Risk as can be observed from this trend from past near fifty years (refer to graph below) and the reality of existing stress in Exports &  Manufacturing .If Global Tensions heighten then there would be Turm-Oil and further pressure on the Rupee on increasing Crude Prices as India continues to be an oil intensive nation that imports over 70% of it’s Oil requirements

We see very clear Present and Future Danger in this dependence and reliance on funds from overseas to fund India’s Growth :

1. Currency risk that will increase our sovereign debt liability on a depreciating rupee
2. An increasing foreign ownership of Indian Assets and Business  

We need to aggressively tap domestic funding to reduce this external debt dependence. The Government has had limited success in monetizing private Gold in India and in Private Public Partnerships. It’s falling back on Disinvestment and Privatisation as a source of Funds raises more questions than it answers as explained in Part III in a separate note to follow. Fresh Independent Effective Thinking without Bias, Fear or Favour is the need of the hour on the way forward to put India back on a sustainable high growth track          .

Disclosure & Disclaimer

Jeena Scriptech Alpha Advisors Pvt Ltd (JSAAPL )is a SEBI Registered Entity offering Fundamental Direct Equity Research Analysis, Equity Portfolio Advisory, Training & Mentoring Services in Capital Markets

This Report is under our free access SCRIP STANDPOINT Module.It is for the personal information of the recipient/reader. We are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. It is our Viewpoint for general information purposes only. It does not take into account the particular investment objectives, financial situations, or needs of individuals & other entities .We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither JSAAPL, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. No part of this material may be duplicated in any form and/or redistributed without JSAAPL’s prior written consent.

In case you require any clarification or have any concern, kindly write to us at : [email protected]  

UNION BUDGET 2020 S(LAYING) THE ECONOMIC FOUNDATION

Disconnect    |     Deficit     |     Debt    |    Disinvestment   |     Dividend   |    Dispute

deduce ~ reach a conclusion by thinking about the information or evidence that is available

deconstruct ~ reduce something to it’s basic elements in order to interpret it in a different way

Here’s the flow of how we have deconstructed and deduced the Union Budget 2020 for you with a focus on the ‘D’s as above offering you a perspective on each supported by government statistics on record .This a Three Part Scrip Standpoint , each of which is being send separately to reinforce the content

PART I    ~ DISCONNECT ~Declining Economic Growth vs Rising Record Sensex

PART II ~ DEFICIT AND DEBT ~ Dancing with Deficit and are Sovereign Bonds the Solution? PART III ~ DISINVESTMENT ~ (Dis)Comfort with Complacency of a High LIC Valuation

DIVIDEND DISTRIBUTION TAX ~ Reverting to taxing the Recipient

DISPUTE ~ Vivad se Vishwas Scheme ~ One Time Offer for resolving Direct Tax Disputes

MACROECONOMIC BACKDROP | SPEECH  | BUDGET AT A GLANCE

Is the Union Budget a Non Event ?

The Sensex may react on the Budget Day as graphically shown below ,but going forward shrugs off this event sentiment and moves on, making the Budget more a Non Event

On Saturday, February 1,2020 we heard the longest ever Union Budget Speech by a Finance Minister when Mrs Nirmala Sitharaman addressed the Parliament from 11 am to pm and feeling exhausted wound up taking the last two pages as read .In her Interim Budget Speech on July 5,2019 there was mention of India becoming a US $ 5 Trillion Economy by 2024/25 and that in the ongoing year itself the GDP would be US $ 3 Trillion.Her Speech on February 1,2020 had no mention of this again .On Saturday, February 1,2020 we heard the longest ever Union Budget Speech by a Finance Minister when Mrs Nirmala Sitharaman addressed the Parliament from 11 am to

The Reason has to be the stark decline in the GDP Growth Rate in the past few quarters and it is concerning that the nominal rate (Real + Inflation) for this ongoing year is just 7.5% from the 12% assumed in the first Budget Estimates last year.

The FM had a tough job balancing the Budget against a Backdrop of declining GDP growth, rising Unemployment and declining Tax Revenues .There is an imperative need to stimulate both the Drivers of our Economy, Investment in Infrastructure and Consumption. Pre Budget, the Government had addressed the first Driver to stimulate Growth by

• Sacrificing Annual Corporate Tax Revenues to an extent of Rs 1,45,000 crs by slashing the Corporate Tax Rate ~ more on this in PART II
• Announcing the National Infrastructure Pipeline of Rs 103 lakh Crs or US $ 1.4 Trillion over five years

The First was a Promise made in 2014 ,but in our View ,given the worrying state of our Economy, it could have been deferred for at least another two years. The Second ,may look ambitious ,but is a much needed thrust though raising concerns of funding as the outlay of US $ 1.4 Trillion equals our current Total Government Debt .The Government focus is on raising Sovereign Debt which in turn, in our view raises even more concern which we have highlighted in PART II

Macroeconomic Backdrop

Declining Economic Growth  |   Growing Unemployment   |     Rising Sensex

Source : RBI,BSE,NSE,CMIE,Budget Documents,Jeena Scriptech Research

The Current Unemployment Rate is 7.3% .The graph below reveals a concern of a much higher Unemployment Rate (UER) in the Youth despite higher labour participation (LPR)

Union Budget 2020 at a Glance

Budget Estimate of GDP for 2020-2021 has been projected at Rs 2,24,89,420 crs assuming

a 10 % growth over the revised estimated GDP of Rs 2,04,42,233 crs for 2019-2020

PART I

DISCONNECT ~ Declining Economic Growth vs Rising Record Sensex

Here’s the clear Disconnect between the declining economic growth, Corporate Earnings/GDP and the rising Sensex

Jeena Scriptech Research

Why this Disconnect ?

Think of Equity as a Table with four Legs being Valuation, Liquidity, Momentum and Sentiment

Despite an alarming decline in the GDP Growth Rates and the Corporate Earnings/GDP Rate as above, the Sensex has risen significantly.

Stock Markets Legs of Momentum and Sentiment have been driven up by the Leg of High Liquidity Inflows from Foreign Portfolio Investment (FPI/FII) and Domestic Mutual Funds (MF) as Statistics below demonstrate.

The High Mutual Fund Inflows into Indian Equity in the years 2017 to 2019 can be attributed as an outcome of Demonetisation in November 2016

Source : NSDL

US $ 14 Billion have been pumped by FPIs into Indian Equity in 2019 and in just over a month in 2020 the FPI Inflow has crossed US $ 1.5 Billion

When have we had before, in a Financial Year in this Millenium ,where on a declining GDP Growth Rate,the Sensex has significantly risen ?

Jeena Scriptech Research

The Table highlights a clear disconnect in the past three financial years from 2017-18

In our view, at 4.8% GDP Real Growth in FY 20, we are at a low base and perhaps may see a marginal decline for the next two or three quarters before we once again rebound and resume a sustainable upward momentum in the coming years

Our GDP will surely reach US $ Five Trillion, albeit not by the targeted FY 25 , and with  a prayer that the Rupee remains stable .Any significant weakening of the Rupee will take this target even further away

One thing to keep in mind is that rising Inflation restricts RBI’s ability to further reduce the repo rate in an endeavour to stimulate the economy

Disclosure & Disclaimer

This Report is under our free access SCRIP STANDPOINT Module.It is for the personal information of the recipient/reader.We we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. It is our Viewpoint for general information purposes only.It does not take into account the particular investment objectives, financial situations, or needs of individuals & other entities .We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither JSAAPL, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only.No part of this material may be duplicated in any form and/or redistributed without JSAAPL’s prior written consent.

In case you require any clarification or have any concern, kindly write to us at : [email protected]