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Sunday, February 28, 2010

Indian Equity Market Outlook - Post Budget

After the Union Budget 2010-11, the big question in the mind of many investors probably is - Will the markets correct more looking at week global cues or positions for long term can be taken at these levels considering better than expected budget?

This article looks into the probable direction of the Indian markets in the next 2-3 months. It is impossible to predict any levels for the indices. Hence, that is not something we would attempt to do. We will primarily try to figure out the probable trend for the markets based on certain factors and events.

Not surprisingly, stock markets gave a rousing welcome to the Budget and rose immediately as the FM presented his speech.

Pranab Mukherjee also sought to raise excise duty for sectors like cement, capital goods and autos, in a mild way — the 2% hike was less than the 4% as per analyst expectation.
  • The Budget was good and coming back to fiscal discipline is a good move.
  • The Budget was also growth-oriented with financing incentives for real estate, infrastructure and agriculture.
  • The Budget another key announcement was that the RBI would consider giving banking licences to non-banking financial companies (NBFCs).  
While the markets got something to cheer, after witnessing seeing consolidation in the past few weeks, weak global cues could remain the party-spoiler ahead. So even as specific sectors get a potential earnings boost, the overall global investment climate continues to remain tepid. The markets are still dependent on the global markets, commodity prices and global currencies.

Therefore, if you are looking to invest for a period of short to medium term, your investments should be in sector specific stocks.

Sectors to Prefer:

Infrastructure - Set to be in high growth trajectory with financing incentives from government.
Non Banking Financial Companies (NBFCs) - Entry in banking space will increase business scope and earning dimensions.

The reasons why we believe that indian stock market might correct further are discussed below.

Valuations still look expensive: 
The Indian markets are still trading at a PE of close to 21. This is higher then the average PE the Indian markets have traded in the last 10 years. Also, the Indian markets have gone up over 100% from its March 2009 lows. After such a steep rise, a correction of even 20-25% can't be ruled out. This would be healthy for the markets in terms of attractive more money as valuations again start looking fair.

China Credit Tightening:
The Central Bank in China has been making efforts to control the credit growth as there is a high probability of asset bubbles and run away inflation in China. Infact, one can say that the Chinese property market is already in a bubble stage. Therefore, there is a high probability of aggressive policy action to control credit growth and this can slow down China's growth significantly. Any such event will trigger a sharp sell off by the FII's in the emerging markets. Hence, the Indian economy might do well and the stock markets tank or correct significantly.

Plenty of problems in the Western World:
The developed world has averted a financial disaster but are surely not out of the woods. The fears of soverign debt default is a very valid one. The fear os the U.S economy slowing down again is also valid and highly probable. Therefore, there are not many positive cues which one can expect from the developed markets.
Inflation Concern:
There is no doubt that the Indian economy is coming back to a robust growth trajectory. At the same time, inflation is also becoming a greater concern. The food inflation has shown no signs of easing and the WPI inflation is also going up at a robust pace.

Sectors to Avoid:

Industrial Commodities - will be negatively impacted if there is a sharp slowdown in China.
Crude Oil Exploration - The China slowdown factor might impact exploration Companies as crude price corrects.