Hearing the Budget speech and reading the Budget papers much later, left this analyst with the same feeling as having a had quick meal at an Udipi establishment in Mumbai.By Jamshed Desai.*
When we visit an Udipi restaurant in Mumbai, we order for hot, strong tea or coffee, soft, piping hot idlis with tangy, pungent sambhar and chutney or crisp, soft dosas nicely browned, served with flourish and eaten with relish. Before you enter any such eatery you know what to expect, and you get exactly that. And you leave paying not much more than what you expected. It's an experience, which is both fulfilling and satisfying and yet lacks the panache and pleasure of fine dining at a swanky upscale eatery.
Besides the obvious South Indian connection (purely unintentional), hearing the Budget speech and reading the Budget papers much later, left this analyst with the same feeling as having that quick meal at an Udipi establishment in Mumbai. Now that we are over and done with that meal we might as well ruminate on what we've consumed. And, wistfully wonder if it could only have been fine dining, instead.
Call it by any name; this Union Budget will go down in history as one of the least memorable in recent times. And yet it has done little wrong by itself. Like the Udipi meal, it has its relishing moments, but its not that leaves you wanting more after its over.
The most significant achievement of the finance minister is reigning in the fiscal deficit to a little over 4 per cent of GDP. Call it sleight of hand or what you will, but if he can push it below 4 per cent next year as he has budgeted for, then coupled with a 7.5-8.0 per cent GDP growth, India's economy could be well on the path of achieving fiscal nirvana.
What's made this seemingly magical transformation possible has much to do with the 8 per cent GDP growth we clocked this year. This growth has been mainly driven by services and manufacturing, both places where it's the private sector that has led the way and grown in spite of the government. This has provided the government with the elbowroom to spend increasing sums each year on education, drinking water, rural electrification, employment, farm sector relief and the sort. It has achieved this without having to raise taxes by much since a buoyant economy has brought in the budgeted moolah from tax collections.
A booming service sector has led to strong service tax collections, which, over a low base in 2005, would have doubled by 2007. So even though excise duties will remain flat or decline slightly, it is the income and service taxes, which will provide the government with enough room to spend. All this has enabled the government to deftly deflect criticism about all the things it should be doing but hasn't been able to do. Things like cutting down the size of government, slashing subsidies, doing away with unwarranted tax sops to the corporate sector, drafting a long term solution to oil subsidies and so on.
This nice soft, fluffy and seemingly wholesome Budget has precluded the government from taking any risks to reform in the face of opposition from its coalition allies. And so we have a Budget that's mum on issues like subsidies, oil sector policy, FDI, disinvestments of PSUs and the like. It plays to the gallery by making all the right noises on building infrastructure, farm welfare schemes, easing credit to food processing and giving excise duty sops to a slew of businesses, all very commendable surely. But given the government's penchant for lip service, it should take much longer than what many expect for many of the budgetary intentions to convert into hard reality.
From a strategic perspective, this Budget pretty much also reflects the manner in which the UPA government has ruled so far... refusing to take risks, tow the middle path, make no bold moves, converting a status quo into a virtue by following the dictum 'if it ain't broke, why fix it?'! And so it's been with this Budget too. Its another of those missed opportunities to do what must be done. Instead, what we have is a workman-like effort from a finance minister who seems smug in the belief that he is already a hero without having to beat up the villains.
From investors' and the stock market perspective, this Budget does little to change the status quo either. The stock market will rally further, more in relief that the Budget did little to harm the bullish trend. It will also reaffirm and perhaps gladden the foreign investors that the fiscal situation is much happier now and that the deficit has been reigned in. In finding solace with the Budget, does one make peace with the bull market?
Meanwhile, domestic mutual funds continue to shovel money from investors into myriad schemes. All of this money is now finding its way back into the market. The post-Budget rally is a consequence of that. Further, the money on the sidelines with the FIIs as well as the retail traders and investors who had held back commitments in the run up to the Budget, is also flowing back into stocks.
Index heavyweights have been clear winners and driven the benchmark indices up in the last two months. However, the mid-caps and small-caps had fallen upon hard times in this period and had retraced a substantial part of their gains. We suspect that this space will make a strong comeback with a bang in the days ahead.
However, even as the Sensex trades at historic highs, a substantial part of the mid-cap space will not follow suit leading to yet another structural divergence in this bull market leg. Yet, the sheer height of the next bounce will render several such mid-caps and small caps to be great trading buys in the ensuing rally.
It must be noted though that we are in the realm of over-confidence, a bullish consensus and one where a majority of the participants do not anticipate a significant decline (read more than 10 per cent) and sound brave when they tell us that they can ride it out.
Religious and charitable trusts are amending resolutions allowing them to invest in equity mutual funds. It's such bullish overtones, the flood of money chasing stocks up to stratospheric valuations and the euphoria of making money at the ring of the bell at 9.55a.m. is what makes us wary.
It's not our brief to put index targets but to identify buying and selling opportunities regardless of where the index is poised. It's our belief that there will be stocks to be bought and sold despite the Sensex being where it is. And so we persist with our list of favorite investment ideas and trading buys, truncated though it is this time.
We must add here that the investment ideas may take longer to fructify, and even lose money should the imminent reversal materialise before long. However TSIS is confident that these will stand the test of time and hence the conviction to deliver them to our readers.
Finally before signing off, we'd like you to mull over what Warren Buffet has to say about market psychology. We think it couldn't be more apt at this juncture.
"Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can't-miss-the-party factor on top of the fundamental factors that drive the market. Like Pavlov's dog, these "investors" learn that when the bell rings--in this case, the one that opens the New York Stock Exchange at 9:30 a.m.--they get fed. Through this daily reinforcement, they become convinced that there is a God and that He wants them to get rich."
*The author is head, potfolio management services and investment advisory, IL&FS Investsmart Limited.
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rally is it anyway?