Unusually, due to the delay caused by assembly elections, the Budget will be announced in mid-March rather than end-February. The pre-Budget period is always vulnerable to a high degree of speculation. The time extension could cause this to become somewhat excessive.
The latest leg of the rally has been driven by power sector stocks. Stocks in generation, transmission, power trading and financing as well as capital goods producers have all beaten the broader market. This is a speculative rally. In part, it’s driven by the hope that the new fuel supply agreements between Coal India and its clients will ensure higher plant load factors.
There are two or three other themes that could trigger sector-wide movements. One is the interest rate story. If the Reserve Bank of India (RBI) finally starts cutting rates, there will be a rally across rate-sensitives. Quite apart from obvious gainers such as banking, financials, real estate and automobiles, a financial loosening could be of special interest to infrastructure.
Funding has been a major constraint for the infra sector. Infra is long-gestation and capital-intensive. Bank lending to various infra sub-segments is now close to exposure limits. There is some speculation about a mid-term rate cut though this can’t happen before elections end and it’s extremely unlikely to happen pre-Budget.
Another potential theme is disinvestment. The government deferred plans through 2011-12 due to bearish market conditions. Given the recovery during the past two months, it may try to put those plans back on track. In that case, it would prepare the ground through various confidence building measures. This could enable selective buying into target PSUs.
A third theme is more complicated. There’s a huge mess in telecom and the government has to try and sort this out as fast as possible. If it cannot resolve the issues in a hurry, it doesn’t really matter what the legal outcomes turn out to be. Foreign investors would lose further confidence and the telecom sector cannot develop without the induction of foreign capital and know-how. If the government can put together a credible plan to rescue the sector after the 2G licensing fiasco, there could be a big bounce in listed telecom stocks.
Finally, there are beaten-down sectors that might be offered some relief in the Budget. This is a big list. There will be the usual rumours floating around in the next few weeks. In reality, the Budget has very little space for sops to corporate India. Finances are in a terrible state with enlarged deficits and there is a list of entitlement programmes and subsidies to be funded. But that won’t stop the rumours from being floated and we could see short-term rallies as a result.
The author is a technical and equity analyst