AMC Chief Warns Against Aggressive Fiscal Tightening in Budget

Budget Priorities: Fiscal Tightening and Government Spending

Shridatta Bhandwaldar, Chief Investment Officer-Equities at Canara Robeco Asset Management Co., has called on the government to refrain from aggressive fiscal tightening in the upcoming Union Budget. Bhandwaldar emphasized that with weak demand, subdued private capital expenditure, and limited growth in household incomes, government spending remains a critical driver for the economy. He noted that the previous budget marked a pivot towards consumption and revenue expenditure, and this year's budget should avoid any contractionary measures.

While expectations from the budget are generally limited, as significant strategic decisions and taxation changes often occur outside this annual exercise, Bhandwaldar highlighted defense capital expenditure as an area likely to see an increase amid current geopolitical realities. He suggested that divestment targets might be raised on paper to offset potentially lower tax revenues. Sector-specific tax adjustments, such as those previously seen in life insurance, have largely been addressed, and changes to mutual fund taxation are deemed unlikely due to past negative market sentiment impacts without substantial revenue gains.

Market Momentum and Investment Outlook

Bhandwaldar observed that over the past 12-15 months, India's equity valuations appeared less attractive compared to markets like Brazil, Korea, and Taiwan, contributing to foreign institutional investor (FII) outflows. However, he sees three key shifts improving the outlook: earnings are bottoming out with downgrades ceasing, large-cap valuations have normalized to fair levels, and India's emerging market valuation premium has reduced from nearly 80% to around 45-50%. Government measures like GST support and corporate tax cuts are expected to boost consumption, while concerns around tariffs may ease.

Canara Robeco AMC reported approximately ₹1.1 lakh crore in domestic equity assets under management and ₹16-17k crore offshore, totaling around ₹1.25-1.26 lakh crore in equity AUM. The firm now has 14 equity-oriented products, largely completing its portfolio construction in this segment. The firm has maintained a steady growth trajectory, increasing market share and expanding its product offerings.

Sector Focus and Investment Strategy

The firm is currently overweight on consumer discretionary, encompassing autos, auto ancillaries, retail, quick commerce, hotels, aviation, jewellery, and grocery retailers. Pharmaceuticals, particularly domestic branded pharma, hospitals, and CDMO players, are also favoured. Within industrials, defence and transmission & distribution segments are overweight, alongside banks and capital market players in financials, with selective exposure to non-banking financial companies (NBFCs).

Conversely, staples remain underweight, though exposure is gradually increasing. IT is marginally underweight due to uncertainty surrounding AI's impact, and oil and gas is underweight due to regulatory uncertainties. The firm avoids businesses with weak execution, poor governance, or bad capital allocation, such as some metals companies and certain retail, banking, NBFC, and EPC firms that do not generate free cash flow or returns above the cost of capital.

Valuations and Market Dynamics

Bhandwaldar believes large caps offer better risk-reward currently, with valuations near historical levels. The market is increasingly sector- and stock-specific, driven by fundamentals rather than market capitalization. Both growth and value stocks are performing, with the market responding more to visible earnings growth. The firm typically maintains 5-6% cash levels, advocating for long-term investment rather than market timing.