Straight from the Specialists
India Markets Weekahead: Book out of high-beta stocks
(Any opinions expressed here are those of the author and not of Thomson Reuters)
The Narendra Modi government presented its maiden budget on Thursday. Although the budget was welcomed by industry leaders, the market meltdown seems to be telling a different story, with the Nifty posting its biggest weekly loss in 15 months.
Should it have been a path-breaking budget or is it prudent to build the economy brick-by-brick by walking the middle path? The much hyped “bitter pill” turned out to be a “bland” one.
Achieving a fiscal deficit of 4.1 percent would be a daunting task unless the economy kick-starts immediately. Budget revenues are highly dependent on a robust economy and a booming capital market. The latest IIP growth of 4.7 percent, the best since October 2012, cannot be termed as a harbinger, unless we see a follow-through in subsequent months.
Although the intent of the finance minister would have been to facilitate the infrastructure, manufacturing, real estate and the SME sector, I wonder whether the next seven months would be enough. Looking at the fiscal health of the country, it was expected that Arun Jaitley would dilute the populist measures taken by the UPA government and even the tax doleouts were to be symbolic. It was strongly expected that he would lay the road map for ease of doing business in India. Instead, it was the usual fare with an added focus on infrastructure.
Increased FDI in insurance and defence could be among the first to see action. The lowering of the real estate development threshold could bring in foreign capital whereas REITs could channelize the huge appetite Indian investors have for real estate. Overall, though the finance minister set the context right, he failed to make the ‘big statement’ for which the Bharatiya Janata Party got the mandate.
The reiteration of implementation of General Anti-Avoidance Rules (GAAR) from April 2015 also led to nervousness on Friday, which saw substantial FII selling to the extent of $120 million. It had been expected that the government will defer this further by about two years. The loss of momentum would have also prompted domestic traders to cut positions as there would be a lack of government-motivated triggers in the near future.
The results season started off well with Infosys surprising the street with better than expected operating margins, thus setting the tone for the other IT stocks. IndusInd Bank also met investor expectations with a 26 percent growth in net profit.
The industrials and cyclical that saw a huge rally in the last few months may not get a further fillip from quarterly results as sentiment seems to have run far ahead of ground-level reality.
The next few weeks would see a gradual reduction of this gap. Public sector banks will continue to reel under pressure due to further equity offerings as recommended by the finance minister. Though we could see an uptick on Monday due to the surprise growth in IIP, it could be utilized by traders to liquidate their positions.
The decision by the U.S. Fed to end bond buying by October could see liquidity getting sucked out from emerging markets including India, where portfolios have shown the highest returns in recent months.
With the waning of the honeymoon period for the new government and a missed opportunity with Budget 2014, the markets would search for the real level over the next few weeks. Any bounceback should be utilized to book out of high-beta stocks and hold cash for lower levels to invest in fundamentally good quality stocks with sound corporate governance.
(For full coverage of budget 2014, click here)