Watch The Fundamentals, Not The Budget
Written By Mr. V.K.Sharma & shared to all by VIKRAM SHAH.
Broader fundamentals and how the currencies move will continue to determine how our markets behave rather than the Union Budget that will be unveiled by Pranab Mukherjee on the 26th of this month.
While Pranbda may have been voted as the World's best Finance Minister by Euromoney in 1984, the markets don't expect anything spectacular from this double MA lawyer, when he rises to present his sixth budget.
Low expectations
In fact, the expectations from the FM are so low that unless he does something really stupid, the markets are likely to be lenient in their marking when they assess the budget. Partial roll back of the stimulus plans is built into the current prices. A more substantial increase than an expected 2% hike in excise, however, could hurt.
While the FM, who has an honorary doctorate in literature, will draw cheers from the treasury benches when he quotes Tagore, there will be little comfort that he could offer on the deteriorating fiscal situation.
The usual hope of the markets rests on the extent and kind of disinvestments the Government proposes to bridge the deficit. This time around, even of the FM proposes a large disinvestment programme, the markets are likely to take it with a pinch of salt, courtesy the recent cold shouldering of the PSU FPOs. The markets could fight back sharply if strategic sale of some assets to the private parties is proposed. That, however, is highly unlikely, considering the ruling party's penchant to play it safe.
On the issue of rolling out of Direct Tax Code and the GST, the market's expectations are that the FM would merely re-iterate the importance and map the road forward. But if he does mention the doing away with the long term capital gains tax (LTCGT) exemption, as is enshrined in the Draft Direct Tax Code, the markets could wilt. On the contrary, any mention of revisiting the issue could bolster market sentiment.
It is beyond logical comprehension as to why should the STT be done away with to bring back the LTCGT. At present, there is no leakage of the STT what so ever. One is not sure, how many will actually pay the LTCGT. My argument is that assuming every one pays, still then the collections of the LTCGT will be less than the present day STT collections.
Derailed
But before we get to hear from Pranab, we will have the opportunity to listen to Mamta . If expectations from the FM are low, the hopes from the Railway budget, which will be presented on Wednesday, the 24th, are abysmally low. The market knows that while she occupies the chair of a Railway Minister, she is at best a 'West Bengal CM in waiting' at heart. She was probably more busy flagging off trains and laying down foundations of projects in her home state last year, with little time for the Rail Bhavan mandarins.
As a result, many of the infrastructure projects that were proposed last year are yet to obtain governmental approval. Some schemes have been hurriedly pushed through only in the last few weeks, possibly because the railway minister needs to improve her 'Action Taken' report'.
The proposal last year to have world-class facilities at 50 railway stations, hasn't taken off as yet. This is just one of the many projects that are gathering dust. As a result, even if Ms Banerjee, announces more projects in her second budget, they are unlikely to enthuse the markets, as there is going to be huge question mark on their execution. Popular railway stocks, however, could do well if there is shunting in the ministry, but the line is not yet clear for that as of now.
Past track record and need to hedge
A study of the past 21 budgets that have been presented, counting the interim ones, from 1991 onwards show a mixed result. In 11 out of the 21 instances, the Sensex closed higher after a week. But after a month from the budget, the markets remained higher only in 9 out of 21 instances.
In 4 instances, when the weekly returns were positive, the monthly returns became negative. Negative weekly returns turned into positive monthly returns only in 2 cases. That clearly establishes the month of March as a greater villain than the budget.
The best post budget monthly returns of 25.63% and 21.32% have come in the years 1992 and 1991 respectively when Dr Manmohan Singh was the Finance Minister. But a lot of credit should go to the great statesman, P V Narasimha Rao who was at the helm as PM. And mind you, he headed a minority Government, unlike the one that we have now.
The worst returns of -13.37% and -11.71% also came under the same team in the year 1994 and 1993 respectively. The Mumbai (Bombay then) bombings also had their role in negative returns for 1993.
On an average, the markets have moved 8% higher or lower from the budget eve during the ensuing month. That means a lot is at stake and investors will do well to partially hedge their portfolio. One must remember that the current month derivatives will expire before the budget. So protection will have to be sought by way of buying March Puts.
However, in the unlikely event of cash being more than 20% of the portfolio, one may buy the out of money calls to hedge the excess cash.
Stick to the fundamentals
With live telecast of the FM's speech and online commentary on television , the markets instantly discount the budgetary provisions. It is often futile to buy stocks based on the budgetary provisions alone.
The Print, Radio, Television and the Internet media will bombard with you with a lot of details. Your mobile will be choked by useless SMS. Speakers at seminars will get their favourite magnifying lens out and find out lacunae that will be of little interest to any one except for academic purposes. Every one has their job cut out. So they will go about their jobs, creating a lot of noise in the process. You will have to keep your cool.
You will have to filter out this noise by applying your brain. While the budget is an important document that may materially impact some industries in particular or investment climate in general, most of the time the immediate moves are transitory. The Long term investors will do well steer clear of this clutter and pay attention to the long term fundamentals alone. The Healthcare, Roads, Education, Gas Pipelines, GIS sectors have been our favourites and hopefully will continue to be even after the budget.
As for short term, how the currencies oscillate, how the Chinese markets behave when they open this week and what comes out of Europe will have a more profound affect on our markets than Dada's or Didi's budget.
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