Weekly Close: Global woes and Budget lows leave investors stranded !

It could have been worse. We started the week in anticipation of a Budget which would soothe sentiments but the selloff in China had global markets scrambling to take cash off the table. Monday was negative momentum of Friday carrying forth. However the markets recovered in hopes for the budget to do something. However Tuesday was a selloff with the Congress getting a drubbing in state elections in two states i.e. Punjab and Uttarakhand and the loss was terrible. It was under this backdrop that the budget was presented with global markets plumetting on fears of selloff as seen in China and also the US markets which its biggest fall in 5 years. Markets were hoping that the FM would pull out a rabit from the hat and change the ratio of market gains (3 out of 10 previous budgets).. but that was not to be. It turned out to be a missed opportunity. FM was conservative in approach with agriculture and education given big focus. However there was nothing for the middle class, nothing to stimulate growth or encourage demand. Thursday saw some recovery hopes but they were smashed. The worries are from winding up of the yen carry trades. Japanese money has been used as cheap source for funding investment across the globe. With increasing interest rate there and an appreciating currency the money is being withdrawn. Its all a game of money flow and we see that in the Indian Markets as well as FII numbers tend to be negative.

There were many fallen angels and of this the big losses were made by the cement stocks and the IT Stocks which were on the receiving end of the stick this budget.

ABB - 4% ACC -6%; Bajaj Auto -11%; BPCL - 5%; Bharti -7%; BHEL -9%; Cipla -7%; Grasim -9%; Ambuja -10%; HCLT -5%; HDFC -6%; HLL -4%; HPCL -5%; ICICI -6%; Infosys -6%; Jet - 7%; Larsen -9%; Mah -9%; Nalco -4%; ONGC -4%; Oriental Bank - 13%; Reliance -7%; Reliance Energy -6%; Satyam -4%; SBI -5%; Steel Authority -6%; Tata Motors -5%; Tata Power -7%; TCS -5%; VSNL -10%; wipro -9%; Zee Tele -11%. There were only two of the Nifty 50 stocks which ended the week positive but extremely marginally. These were ITC and Suzlon. ITC had the negatives already priced in ahead of the budget and no talk of VAT had the stock up. Suzlons open offer for Repower opened this week and that was the reason for strength.

The Finance Minister in his budget speech talked about 10% growth targets and 4-5% inflation growth. Largely this is an ideal level. However these targets dont seem to get reflected in the numbers. The Tax revenues growth at 17% is not bouyant and prices in caution to an extent. Corporate Tax is assumed to grow at 15% and thats a worry. This in a scenario where there is a 1% education surcharge which has been added. Income tax growth is expected to be more bouyant at 19%. Is this the effect of a wider base. Service tax is expected to be extremely bouyant. The revenue account expenditure growth is high and thats the cost of running the Government which does not seem to be in control. The plan expenditure growth is only 9% in a scenario where revenues growth is taken at 10% (excluding the SBI buyout from RBI). Fiscal consolidation with revenue deficit at 1.5% of GDP and fiscal deficit at 3.3%. seem to be on targets. Really not much to take away from here as India sits at a critical point where interest rates have sharply run up. How the economy reacts to that brings in this uncertainty. Government spend is not too high to stimulate the economy and the impetus to private sector investment into capacity is missing. It of course will do if consumption goes on at a high pace but the Budget also does not provide impetus for consumption as well.

All in all its insipid with some talk of higher education and some focus on Agriculture. Increasingly the budget has become a non event, just that it becomes an opportunity for the FM to showcase himself to the world in terms of some big steps. This trend started with Dr Manmohan Singh who became famous only on the back of his path breaking budget which started reforms. This was an opportunity missed. This was the first time an FM who had to present had such strong backing in terms of bouyant revenues, bulging forex reserves and an economy which is vibrant. What was lacking was conducive political climate and inflation worries which bogged him down. A Missed opportunity clearly. Next year will be no different as it would be the last one ahead of general elections and populism will be the name of the game.

SKF bearings was one of the stocks which was strong this week . The performance has been exemplary and the company is set to grow well. Outsourcing is what its intentions are manufacturing bearings for the global needs given the low cost manufacturing here in India. The stock has been a super performer in the adverse conditions. We believe there is more to it. Do read our research on that this week. There is also a note on FAG Bearings as well where we are excited. We had a wow call here and thats only partly booked in profits.

Technically speaking: 12800 seems to be a support level of sorts. This is likely to be tested next week. Technically the two most important levels are 12710 - 13300 which is a range of 600 points. If the markets break through 12710 then markets are headed for deep trouble as the selloff could be extensive. So next week is crucial really.

The market selloff in the last one hour came in with rumours of Mauritus FIIs being taxed etc but really thats more of an excuse in a market which has become heavy with no positive triggers and great expectations. The best performing sectors have been biting the dust. First it was the sugar sector and Banking. Then it was the construction and real estate stories which are biting the dust with no takers. This budget followed it up with Cement and IT . Its only Telecom which seems to be hanging in there. May be that will go to..

Strategically speaking: Inflation is the worry. The number at 6% does not leave much hope but we that to cool off given the base effect wearing off. We believe that with lack of positive triggers missing for the next couple of weeks markets will be directionless and lacklustre. Driving the markets will be FII numbers and more driven by global sentiment. For now the mood and sentiment is down. One could get many mid caps at attractive levels. These of course one has to get ready to see at much lower levels as the large caps will correct to more reasonable valuations than they are right now.