The Hindu Business Line : A glass half full

The reason for this is not what is in the Budget or what is not, but the fact that subsequent to the election results, there were huge expectations with regard to policy announcements regarding the long-term direction of reforms, de-regulation, disinvestment, reduction of fiscal deficit, etc.

Ripe for correction

The market were excessively buoyant post-election results and the Indian markets, over the last few days, had come to be the best performing markets in the world for the current calendar year.

I believe that the markets, in any case, were ripe for a correction and they just needed an opportunity to correct and the Budget will become a reason for that.

As far as the Budget proposals are concerned, the factors that are likely to have a negative impact in the near term are the high fiscal deficit and no clear roadmap for the reduction of the same.

There is a clear illustration of the expenses that will be made under various schemes.

However, there is no specification on the revenue side, there is no clarity on disinvestment and its direction.

There is a mention of oil price and fertiliser segment deregulation but no specifics. There is increase in rate of MAT.

However no route towards the return to FRBM targets, no specific measures of improving credit flow towards infrastructure investments, etc.

Positive factors

The positive factors are the elimination of FBT, CTT and surcharge on personal income tax, increased focus on rural development which should boost rural income and demand, a degree of focus on renewal energy, a move towards giving subsidy to improve the agricultural supply chain, a greater focus on education and setting up of new institutions for the same.

On an overall basis I believe that the markets were ripe for a correction to 3,900-4,000 levels of the Nifty and 12,500 levels of the BSE Sensex as the markets were looking too top heavy and they had built up excessive expectations vis-a-vis sectors such as infrastructure, banking, etc.

Given the fact that we have had an over 15-week rally in the markets, I believe that post Budget, we should see a four-six week corrective phase which should see the excesses in the markets getting purged and the markets returning to a more reasonable valuation level.

In the corrective phase the sectors that benefit from higher consumption, such as FMCG and automobiles, should outperform along with other defensive sectors such as Pharma. However, in the long run, the sectors that contribute towards the growth of the Indian economy such as construction, capital goods and banking should be picked up for the longer term bull market which will play out over the next four years. Most of these sectors had seen stocks running up by 100-150 per cent since March and should see a correction of 20-30per cent from the peaks and at that level it should make sense to invest in the markets in these sectors.

I believe a return of sanity will provide good opportunities for building up a portfolio which was difficult to do in the kind of momentum market we saw over the last few weeks.

(The author is CEO-PMS, Prabhudas Lilladher.)

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