Tackling the Budget aftermath

The Indian market has had a great run in the first two months of 2012 and March promises to be an interesting month. With the UP state elections, the upcoming Union Budget and the subsequent monetary policy and economic review, the month will see its share of volatility. However, market watchers do not expect more than a 5 percent correction in current market levels.

Post the slowdown in 2011, markets have already moved up by about 25%. Several stocks have shown exponential growth having doubled or tripled in the past 6 weeks. There has been increased liquidity. Nearly USD 4.5 billion dollars have been pumped into the equity markets through FIIs as compared to only $ 400 million in the whole of last year and that is what has been the driving force behind the markets’ sharp move in the last six weeks.

While markets have shown optimism and buoyancy, we would still advice some caution. The markets continue to look positive in the long term while the short term dictates a slightly more careful approach. As we alluded to earlier, there can be some roadblocks to progress and some disappointment still to come through which may lower valuations.

This however, would be the right time to enter the equity markets and stay invested. We would recommend having a stock specific approach and to selectively accumulate stocks which we like rather than bulk buying across sector because the risk-reward situation is almost in balance. There are several stocks which are still available at good valuations. There can be up-sides over the next 6 to 9 months in these stocks especially post the Budget announcements.

FII inflows continue to look positive and there is liquidity in the markets. However, domestic investors are seemingly risk averse right now and reducing the beta in their portfolio to selectively book profits. There continues to be good demand for quality stocks and that is a very positive signal for the capital markets.

Global liquidity continues to be reasonably strong but the markets will be keenly waiting to better understand the stance on India's macro-economic factors post the Union Budget. Despite the liquidity, Indian GDP may continue to be affected given high prices on crude, the ongoing economic crisis in Greece, Portugal and to an extent even France.

Markets will also be affected by expected policy announcements and their proposed implementation. What the Government's policy action would be and how positively they attract domestic and foreign investment will also impact the markets in either scenario. The Centre’s strategy to curb fiscal deficit and the RBI’s upcoming monetary policy would also pose challenges for current market buoyancy.
If all factors turn out positive, then we have a very good market scenario going ahead but that is something that we will not discount at the current point of time and that too especially at these valuations.

While the liquidity can move the markets up to certain levels, which we have already witnessed, we will need domestic policy reforms clearly outlined. That would provide the much needed positive trigger that the Indian economy needs to promote growth. Crude prices continue to be a key concern for India. If it continues to remain the way it is or if it further increases, it could prove to be a dampener for future market growth. So, if that is stable and it comes off and we are able to manage the interest rate environment then there could be positive upticks in the markets.

So accumulate stocks, be very stock specific, try to find out stocks which are available at reasonable valuations and buy them at current levels prior to the Budget announcements. Stay away from stocks which have already moved up very fast and very significantly because these might not have been supported by the improvement in the fundamentals which we have witnessed till now. Keep a long term perspective and watch out for the triggers mentioned to consolidate your position and buy or sell in time to reap the benefits of market growth whilst staying cautious of negative downtrends. Happy investing!

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