There is big curiosity among investors with regards to Budget, its consequences and market behaviour post Budget.
It is a well known fact that the government coffers are empty with failure of disinvestment, rise in oil prices and rise in subsidies. The fiscal deficit is pegged at 5.6% on realistic basis though the possibility of keeping it below 5% by making strong revenue projections is not ruled out.
The political equations as well as financial health of the country read with huge slippages will not allow the government to become benevolent with corporate India, as well as the people of India in this Budget. At the same time this may not be a populist budget as there is one more budget before 2014 elections.
Prime Minister Manmohan Singh has claimed that he carries the required numbers to see the budget through. It seems that the Samajwadi Party may support the UPA and at the same time Mayawati may not withdraw support so early due to her recent loss in Uttar Pradesh.
This political situation only can give a ray hope that the UPA may pull out some bold measures in this Budget. It may even bring back 80 HHC to boost exports which is the need of the hour to counter the rising Imports Bill. The government may even speak on privatisation as this could be a big leap forward to fill the gaps of partial disinvestments.
Therefore the first premise I believe which can see some upside in the market could be well-defined, reforms-oriented Budget.
At the same time I cannot rule out the possibility of the Budget being a non-event and if that happens then the implications on the market:
There may be a knee-jerk reaction on Budget which can see a correction of 200-odd points on Nifty if the Budget is a complete disappointment.
However, from 5,000 to 5,200 levels, the market will bounce back very fast. There could be replica of UP elections results scene. Markets first went up and then tanked when SP got clear majority. Later on the market did not only recover but also crossed new levels.
This will happen not because of the Budget but for the fact that the era of rate cut has started. So far the RBI has cut over 100 bps CRR which has released a good amount of liquidity in the system. The Euro liquidity will create some buying in emerging markets (EMs) in the coming days. I believe that at least $3-4 billion will travel to EMs and India will be one of the big beneficiaries. In anticipation, many funds have started accumulating good quality stocks.
Another driver is rate cut. Though on March 15 there may not be a big action from RBI as CRR cut came on 9th itself. Yet, rate cut will start from April and probably we can see more rate cuts throughout the year. This is good from the point of view that the economy will be back on the growth trajectory. Corporate earnings will start improving on the back of easy and cheap financing. Expansions on hold can see light of the day.
Technically too when market rose 22% from 4,531 to 5,627 in January and February, the doors of 5,840 were opened with huge support at 5,170 200 DMA, leaving the risk-reward ratio in favour of longs only.
We are close to end of FY12 and the valuations based on Sensex earnings for FY13 are justified at 18,900 to 19,200. At the same time, the ownership pattern has become very skewed which clearly suggest the rise will be faster than anticipated.
The only drawback which I see where market can tank to 4,900 levels without any fundamental reason is the absence of physical settlement. I have seen Indian markets rise and fall 10 to 11% from September 2011 till February 2012 only for this simple reason which is a unique feature of Indian markets.
The bottom line therefore is - remain long with target of 5,840 and with support of 5,170. The stocks which have not participated in the rally can give good upside, eg - Sterlite Techno, HDIL, J P Associates, Century Textiles, ABAN Offshore, Bombay Burmah, B F Utilities, RIIL, Hindalco, IDBI, Mahindra, Tinplate, PNB Gilts, etc. One can avoid momentum stocks which can slip much faster than the Sensex.