Keep a watch on the stock performance of IT, shipping, energy and financials to gather signs of improvement
The Budget has changed very little structurally. There are no big reforms. Nor are there major new taxes. Pranab Mukherjee has gambled on the cyclical recovery gaining strength. It's a missed opportunity. This is close to the midpoint of the UPA-II term and it would have been a good time to push through some reforms. Every year that goes by without various obvious problems addressed means hidden losses in terms of lost growth.
Be that as it may, there is now little imperative to review asset allocations or change stance on any sector. The economic cycle will chug along. Corporate projections made pre-Budget don't really need revisiting. As and when inflation eases, consumption will improve.
Looking at valuations again, at a PE of 21, the Nifty remains unattractive. It's well above the long-term (2000-2011) average of PE 18 and just inside the bandwidth of average+ one standard deviation (Std Dev = 3.8). Comparing interest rates to earnings yields suggests more downside.
However, consensus EPS projections do suggest the Nifty basket will grow at roughly 15-20 per cent in 2011-12. That's enough to pull the forward PE down till 17-18 if the same index levels are maintained. This implies valuations are high but not totally unsustainable.
So, the investment mantra would be to continue to invest, cautiously. I'd personally prefer index levels to dip below Nifty 5000 before making big long-term bets. But taking SIPs in diversified equity funds from Nifty 5500 should mean reasonable returns on a 2-3 year perspective.
I've mentioned the concept of using casino-style SIP methods earlier. Many gamblers use systems that increase stakes after losses. A similar method of increasing SIPs on a downtrend accentuates the inherent averaging-down and reduces the cost of acquisition more. That logic continues to hold post-Budget – manage resources carefully and be prepared to increase SIP instalments if the Nifty does fall 10-20 per cent, or even more.
It may also now pay to start going overweight in infrastructure sectors. This is not because the Budget does a great deal for infrastructure though it should make funding a little easier. It is because infrastructure has lost a disproportionate amount of ground.
Since Jan 2010, while the Nifty has been near-stagnant (gaining 6 per cent nominally with inflation running much higher), the CNX Infra has lost 19 per cent. Any recovery could make it an outperformer over the next year or so. The broadest bet on infrastructure would be to take SIPs in the Benchmark Infra-BEES ETF. Again, as in other diversified equity funds, be braced to increase your monthly SIP-quantum if the CNX Infra continues to lose ground.
There are also a few sectors I would watch with great care. One is IT. The performances there will mirror global economic performance. An overseas recovery will be accompanied by bigger IT budgets and that will translate into revenue expansion.
Another sector worth watching is shipping, since it is also cyclically dependent on global factors, rather than domestic. If there is a sustained recovery in shipping, it would be a strong indicator of trade recovery. The chances of Budgetary projections being met or exceeded would increase considerably, and other trade and export-oriented industries would also be set to bounce.
A third sector I would watch carefully is financials. Banking, NBFCs and housing financiers have all taken some stick due to higher interest rates. I don't think that inflation is anywhere near tamed but the first signals of a turnaround in inflation scenarios would come in these stocks.
The fourth sector I'd watch is energy. That's where I suspect the government will have to take hard decisions about subsidies soon. The Arab revolutions have already pushed crude prices above $115/ barrel and a further rise is quite likely.
It's tough to conceptualise situations where inflation comes down significantly, without a drop in crude prices. Nor is it easy to see how the Budgetary Fiscal Deficit projections can be met if crude prices rule high. Especially if there's a knee-jerk refusal to review the current subsidy structure in diesel, kerosene and natural gas.
These four sectors are difficult to call in terms of recommendations. Business conditions could pan out several ways. That's why they should probably be on a “watch-list”, rather than binary buy/ sell recommendations.
But they are easy to track. You'll know for sure if the petro/gas subsidies are reviewed. In the other sectors mentioned above, a close watch on stock-price performance and company advisories should together help to flag signs of any imminent improvements.
