Bourses rally after budget

Market impact: Stock inv estors & brokers see a bright future

Going by the very positive reaction in country’s two premier stock markets –– the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), after the announcement of the Union Budget for the year 2010-11 on February 26, 2010, it is clear that the business community has given clear thumbs up to the Finance Minister Pranab Mukherjee.

On the day of the budget the stock markets cheered and pushed up BSE Sensex by 175 points and the NSE Nifty jumped up by 63 points. Though there were ups and downs in the stock indices in the following days, as on Friday last the Sensex closed at 16,994 with a gain of 740 points (4.55 per cent) since budget and the Nifty closed at 5088 a gain of 228 points (4.69 per cent) since budget.

Sentiment boosters

The bullish sentiment is so strong that some experts believe that Sensex may touch its two-year old peak of 21,000 by the middle of 2010. They think that the Indian economy in the coming years will remain on a high growth path as the Finance Minister has focused broadly on fiscal consolidation and higher consumption through rise in disposal income in the hands of consumers.

At the same time, the budgetary proposals kept the growth engine intact with emphasis on investments in infrastructure. “Unlike earlier budgets, this time announcements were less negative than what people expected and coupled with strength in global markets has sparked the rally,” said Canara Rebecco Asset Management Head of Equities Anand Shah.

There are many other positives. The government has laid down the roadmap for further improving the fiscal consolidation and plans to lower fiscal deficit to 4.1 per cent of GDP by 2012-13. This would also accelerate the economic and corporate growth from financial year 2011, said the head of a stock broking firm. The budget provisions would not only yield more resources for the private sector, but also alleviate pressures on interest rates.

No party spoilers

Some market pundits think that brokers are happy because ‘no bad news is good news’. They heaved a sigh of relief when the Budget did not come up with any unexpected pronouncements. Partial rollback of stimulus was expected and very much discounted earlier. The hike in oil prices, is not big enough to create problem for the economic growth, they felt.    Market also took comfort in the fact that the net borrowing programme of the government was slightly lower than expected, besides positives like road map of fiscal discipline in terms of deficit as well as public debt. Large reductions in income tax will generate more surplus in the hands of investors and a part of it will be used to buy stocks.

In this context, Birla Sunlife Mutual Funds Head-Equity Ajay Argal said, “The indirect taxes increase was broadly expected, though the reduction in the personal income tax was definitely a positive surprise. These factors have contributed to the rally.”

Dynamic assessment

Markets, however, will continuously evaluate whether the assumptions made in the budget on revenue collection, expenditure curtailment, PSU divestment, revenues expected from 3G licenses turn out to be reasonable.  

“Apart from these the factors like Global cues, Oil prices and corporate earnings growth will affect the sustainability of the market rally.” It is indeed uncertain how much of Rs 30,000 crore the government expects from 3G auction will actually come. Yes the disinvestment plan is also big with a target to raise Rs 40,000 crore from sales of  PSU shares. But this will depend on the market conditions. The positive news from abroad is that developing economies have started showing signs of sustained recovery aided by their government’s stimulus measures, as such the global investor appetite for risk in emerging markets (read: India) has begun to improve.   

The proof of improving appetite of overseas investors for India company shares is clear. Foreign funds have invested roughly Rs 4,683 crore in five trading sessions following the budget. Earlier since January this year FIIs had pulled out over Rs 10,000 crore from the domestic equities.

Better demand

Other positives that paved way for market rally are robust cement and automobile sales in February. Besides, India’s exports rose for the third month in a row boosting hopes that it may be sustained.

Though global macro factors will be a concern, still the second half of the current calendar period will be better for the emerging market equities, opines Deutsche Equities Head of Research Abhay Laijawala.

Specific on India, his take is that “If good monsoon prevails, the GDP of the country could very well hit 9 per cent. In all likelihood, India would outperform its peers.”

Commodity researchers in the US now say that the EL Nino is reversing which enhances the possibility of more than normal Indian monsoon this year. If this happens, the government’s estimate of 8.25 per cent growth in GDP for fiscal 2011 may turn out be conservative as the actual growth could rise to 9 per cent. As such, Laijawala continues, even as the scenario will be choppy in the next half of this calendar but within emerging markets too, some like India with robust fundamentals will possibly outperform some of their other emerging market peers.

Cautious approach

Some of the domestic investing sectors are less enthusiastic in buying. The selling largely came from insurance companies and mutual funds, as part of profit booking that normally takes place in March every year by domestic institutions.  “We believe that the markets would build on gain from here and as such we advocate investments with an overweight stance on the Infrastructure and Banking Sector,” said Angel Broking Chairman and Managing Director Dinesh Thakkar.

Unlike earlier years, he felt, this time around the market went into the Budget, with very low expectations and was reflected in the way the markets behaved before the event. “The  Budget not only met the overall expectations on the D-street, but positively surprised markets.”

Antique Stock Broking MD Kirti Doshi is of the view that if nothing bad happens in the European countries, which is the largest fear everybody has in mind, by April second week, the NSE Nifty should cross 5,300 mark. Of course, the pressure will be there and the feeling in the market that it may face strong resistance at 5150-5200 levels, he said.  
In the absence of major domestic triggers, Indian equities may eye global cues as market enters a consolidation phase after a strong post-budget rally.  As the recent global economic data being mixed and sovereign debt problems in the euro zone continue to haunt global markets, the Indian market would come in handy –– and safe too –– for foreign investors with the country’s economy remains encouraging.