The Road Ahead.....

Asian markets YTD performance have been mixed with Indonesia, Philippines & Thailand performing exceptionally well and at the same time India, Hong kong and Korea giving negative returns. Though the biggest underperformer remains the Indian markets with a 3.6% YTD decline. At the start of this calendar year 2013, Indian sentiment remained quite optimistic and India specific research reports were majorly predicting a new high in Nifty & Sensex on the back drop of improving fundamentals and earning outlook. And as things stands now, we are struggling to hold the 200DMA stacked up at 5650 in Nifty. This is in contrast to the developed markets which are either hitting all time highs or are at a kissing distance from the all time high. It doesn’t seem that the contrasting trend in the market is unanimously across Asian markets or a strategic call in between the developed and the developing markets. In the last couple of weeks, first the budget-2013-14 and thereafter the money laundering revelations being sensationalized (which RBI overruled later) and then the political development has triggered a fall in the Indian market. And the interesting part is that the fall has been without no major outflows from Foreign institution Investors and the DII’s continue to sell in the bourses. More alarming is the fact that midcaps continue to bleed heavily and March month was one another disaster. Retail participation continues to remain bleak and prices of majority of stocks outside the Nifty component reflects a horrifying picture of the market internals.

For the last three calendar years i.e., in 2011, market remained extraordinarily bearish, in 2012 it was quite bullish and in 2013 the tone seems to be bearish and the broad contours have been from 4500 to 6200 in Nifty. In 2011 market started declining after a failed attempt to cross all time high from 6200 and marked a low of 4500 in almost a years time and thereafter in 2012, it staged a rally and again attempted to cross the all time high and in 2013 it reversed its trend from almost 6200 despite of the fact that developed markets and specifically US market is making all time highs. Though for our market, a spate of domestic developments have weakened sentiment considerably. Auto sales data, Cement dispatches, telecom subscriber’s data, capital goods order inflow and other crucial data continues to remain sluggish, indicating weaker demand for industrial sector. On top of it, to further accentuate the problem, quarterly GDP print coming at 4.5% and DMK, a key ally, pulling out support from the UPA-II government adds to more uncertainty.

Going forward, it seems that the market has to live with the political uncertainty and risk of an early election in 2013 looms large. The UPA-II coalition remains vulnerable because of its key ally i.e., DMK, surprisingly withdrawing support and remaining parties like the SP and the BSP cannot be relied upon with any degree of certainty. Now the relatively less reliable parties who are supporting the government from outside may pull the string and market may initially react violently as and when it happens. Broadly from the valuation stand point market is trading at roughly 12.73 times one year forward earnings which is reasonably below historical mean valuations. Any sharp fall would throw excellent opportunity to add on to reasonably good blue chip stocks in 2013. The recent political development will certainly put reform process more difficult and populist measures will take precedence.

For 2013, it seems that two major triggers could have a bearing on the markets. First, the political upheaval which has already been discussed above and secondly, the CAD and the BoP situation. At a time when USD is strengthening against major currencies whereas majority of the Asian markets are still reeling under economic slowdown will have negative consequences reflecting in their weaker currencies. It needs to be seen that how far the central bankers move in order to defend a weaker currency. Though RBI somewhat seems to be following the stance of defending the rupee by selling dollars out of its reserves. This may have an effect of a larger degree in terms of tight liquidity situation and tighter monetary policy. It all depends on the behavior of Dollar against a basket of currencies. Dollar strengthening in 2013 probably could be a harbinger of bad times for emerging markets and needs to be closely watched. Moreover for India, more than the external account imbalance, capital flows drying in 2013 will have an immediate impact on the markets in a rising dollar context.

These two global and local event have the potential to spook the market in 2013 but those events if it were to happen would give a great buying opportunity into good quality stocks as the valuations would be extremely compelling once these negative events plays out and market reacts in a jiffy. At present macro indicators seems to be at its worst form and things would be better than what they are today in next twelve to eighteen months whether it’s the interest rates, GDP growth, earnings outlook, inflation or the IIP growth. Hence ideally buying opportunities should be seized in the present moment. What companies to pick and choose from is an individual’s call. Our broader generalized call would be to stick to the blue-chips and large size companies with good corporate governance, strong franchise and better cash flows will take care of  better returns in the future.

Growth Indicators...

Budget Review 2013-14

One of the overarching vision in this year’s Union Budget is fiscal prudence. At first glance, Union Budget for FY2013-14 looks unattractive. However, a closer look does reveal that the Finance Minister has indeed walked a tight rope considering the precarious maco-economic scenario we are in. While the government has made resolute efforts to arrest fiscal slippages and announced some bold policy measures in the recent past, growth continues to slow alarmingly; the current account deficit remains unsustainably high; the investment cycle is showing no signs of revival; and inflation, despite some moderation, remains well above RBI’s comfort zone. In fact, the latest GDP figures for Q3 (at 4.5%) is no less than a horror tale. However, one should feel relieved that the budget has not been exceptionally populist. Despite a reasonably sensible budget with stable tax, stock markets were left confused over the retrospective changes suggested in Section 90A of the Income Tax Act relating to existing tax relief to foreign investments from countries having a Double Taxation Avoidance Agreement (DTAA) with India. Following an uproar, it was later clarified that TRC (tax residency certificate) will be accepted as sufficient evidence of residence including investors routing money through Mauritius to claim tax benefits under DTAA. In fact, there is a possibility that the offending sentence “not sufficient “could be dropped altogether when the finance bill is debated in the Parliament.

Finance minister P. Chidambaram’s target of lowering the fiscal deficit to 4.8% of gross domestic product (GDP) in the next financial year is based on assumptions of robust growth in tax receipts and compression of the subsidy Bill, but experts are a little apprehensive about his arithmetic calculations, since the calculation is based on the premise that large money could be raised through spectrum auction (which looks difficult) and divestment. He should be applauded for containing the fiscal deficit for the current year to 5.2% of GDP, a tad lower than his own revised target of 5.3%. He achieved this reduction by brutally cutting plan expenditure meant for developmental projects by Rs.91,838 crore. Finance minister however failed to curb non-plan expenditure, which includes defence expenditure, interest payments and salaries, which rose by Rs.31,738 crore and thus received some kudos from comrades. Despite his valiant efforts, Revenue deficit, or the difference between current expenditure and current receipts, as a portion of GDP has actually risen in 2012-13 to 3.9% from the budget estimate of 3.4%. In 2013-14, Chidambaram is targeting a revenue deficit of 3.3% of GDP.

Although, there has not been significant populist measure to jeopardize Govt.’s fiscal consolidation plans but equally impressive is the political salience of the budget. Chidambaram passed over on the chance to spend his way to the next general election in this budget, like he did in 2009 with the Rs.60,000-70,000 crore farm loan waiver probably because of the weak economy, which would otherwise have crumbled out of the populist measures. Yet, he managed to appeal to the Congress party’s traditional constituencies—poor, minorities, scheduled castes and scheduled tribes—by leaving spending on them untouched, and also appealed to the party’s emerging constituencies such as young people and women.

            Where the FM intend to keep squeezing?          Where has the FM increased spending?

Finance Minister also expressed his serious concerns over burgeoning current account deficit and placed it at a higher priority than fiscal deficit. He was also critical of the declining savings and investment rate in the country. The announcement of an additional investment allowance of 15% for capex of Rs 1billion or more during FY14-15 for the corporate sector is a major boost to them. To boost the infrastructure sector, funds have been created but just the 2 years window is a extreamly impractical capex phase & FM should consider it extending to 5 years for getting any serious capex commitment from India Inc. However, a lot remains to be done on the reforms front to carry on the show. On the personal income tax front, there have been no change in tax slabs and at the same time tax credit of Rs 2000 will be distributed between income slab of Rs 2-5 lakh. At the same time he could have done a little more on this front considering “aam admi” is under the brunt of heavy inflation. Taxing the super rich (income over Rs 1 crore) with a 10% surcharge can again be considered a prudent decision. There are 35 million total tax payers and roughly 42,800 tax payers who are super rich. Thus, it is almost clear that in a country with population of 122 crore, the tax network is very thinly penetrated and there is rampant practice of tax evasion. More clarity on GST and DTC is however still required and implementation of it seems to be a herculean task in the near future.

                                                        

                                               Freezing social-sector spending?

Overall, given the limitations, there were very few steps that the Finance Minister could have taken to impress each and everyone. In fact, the theme of the budget was “responsible” and the minister has lived upto the expectations. But more could have been done because the current Finance Minister understands the economy much better in any given condition. It is prudent to see fiscal prudence even on announcing populist measure such as food security bill or allocation funds to MGNREGS programmes. The planned expenditure has budgeted to grow 29% while the revenue receipts have been budgeted to grow 21%. The figures look optimistic, considering that much has not been done to boost tax revenues while maintaining expenditure to GDP at almost constant levels. The fiscal deficit for the current year has been restrained at 5.2% but it has been largely done by scaling down the planned expenditure in the last half of the fiscal year. However, with the election drawing near Government finances may come under strain and pressure to boost government expenditure will mount. Thus, there’s every chance that Finance Minister’ planned expenditure might go haywire for FY13-14 and stance on fiscal consolidation and prudence will be really tested then. Besides, the subsidies (fuels, fertilizers and food) have been pegged lower by 11% at Rs 220,971 crore with oil subsidies projected at Rs 65,000 crore for 2013-14 against the revised estimate of Rs 96,880 crore in 2012-13 fiscal. However, these optimistic calculations largely depend on the partial decontrol of diesel and under-recoveries which again depends the global crude oil prices. Further, Govt. also expects to garner around Rs 56,000 crore in total from divestment and ~Rs 40,000 crore from telecom auctions, which are very optimistic projections and doesn’t look practical to materialize. These are the potential risks which might throw Mr. Chidambaram’s fiscal consolidation plan out of the blocks. However, given the latest GDP figures, we can only rely on RBI that the easing of the interest rates will continue and be more aggressive in the coming quarters.

                                                       BUDGET STATISTICS