Of budgets and market direction

In my previous post while discussing Indian stock markets I had mentioned that the annual budget was likely to influence the market direction. Much expectation was built around it. Market's immediate reaction however was negative and the indices corrected significantly post the budget announcement. Some felt that since a great deal was expected from the budget which was not met, the markets gave it a thumbs down. It was clear however that the Finance minister missed a great opportunity to reverse India's image of being slow in bringing in reforms. With the kind of support it received in forming the Government particularly absence of the left parties, Government could have gone ahead and announced big ticket reforms to make India attractive for greater foreign investment. There are host of financial sector reforms that could have found merit. Dilution of Government ownership in companies through a process of stake sale has been pending for a very long time. A clear road map on this is very much needed as this country cannot go on paying for inefficiency. Subsidies is another area which has no place in a country which thinks of becoming an economic power. Government spending on private fuel consumption is unheard of any developed country. Labor sector reforms is vital to free the corporate sector which could then churn more growth.

The resounding crash of the stock markets prompted the Government to hastily offer clarifications which helped arrest the fall. Markets had however recorded a highest ever budget day fall. But the extent of the fall was sort of a knee jerk reaction as there was nothing in the budget to warrant such a fall. To be sure there is a cause for worry in the fiscal deficit number which is pegged at 6.8% of GDP. This no doubt is high for comfort. But the finance minister has clearly indicated that this was deliberately kept so in a scenario of slow growth and will be progressively brought down in the following years. This is to be seen as it is not clear how this will be done.

Other than this there are quite a few positives. Government has provided for a 36% increase in expenditure for 2009-10. This is fantastic inspite of the payout in connection with pay revision of Government employees. The economy couldn't ask for a better stimulus. There is an overwhelming emphasis on infrastructure spend . A staggering 9% of GDP of the country is targeted to flow in by way of investment by 2014. Add to this a hefty increase of direct spend on both rural and urban development projects of the Government. This will result in a very enviable order book for the core sector industries. On the taxation front Government appears to be quite serious about bringing in reforms. Rolling out unified Goods and Services Tax is high on the agenda. Since indirect taxes are high in India this is expected to make India a more competitive manufacturer in comparison to other countries.

As for the corporate results for Q1, the numbers so far are very encouraging indeed. Core sector industries comprising of coal, cement, steel, power and oil have grown at 4.8% as against 3.8% during the corresponding period last year. Month on month it has grown at 6.5%. Car maker Maruti posted an increase of 25% in it's net profits for Q1 as compared to same period last year. Telecom company Bharti reported a rise of 22% rise and a record 8.5 million subscriber addition. diversified company ITC reported a jump of 17.4% in Q1 net profits. Power equipment maker BHEL's net profit is higher by 22%. India's largest private sector bank ICICI and second largest lender recorded a 21% rise in net profits. These are the who's who of India's corporate sector. And they have done a commendable job.

Markets in the meantime have recovered from the budget day lows and is hovering around its resistance zone. As mentioned in my previous post this is very strong resistance area. Charts are indicating short term strength albeit approaching overbought conditions. Even if the current momentum takes it past the resistance zone market will be at overbought levels. Markets can continue to rise even being in overbought levels for long time. whether that will happen or not will depend on factors such as global markets, FII inflows and monsoons. As per the latest indications monsoons are not expected to deviate much from it's long term average though major parts of North India are already in draught or near draught conditions. Stop loss level now stands at 13700-14000 for the sensex

On the international front Dow has been holding over 9000 for 2 consecutive days. This is an encouraging development. At any rate US markets were vastly oversold when they reached the bottom and a good recovery cannot be ruled out. In the meantime more American banks are reported to have fallen. It is a known fact that markets recover before the economy does. If the US economy has reached the bottom then probably its time the markets start recovering.

Until my next then,

Happy investing