|The B-day finale: Anxious industrialists
gathered at CII's Delhi headquarters to view the FM's Budget
is supposed to be the month of the 'pre-Budget rally', observed
almost ritually by stockmarket players year upon year, based on
expectations of a dose of adrenalin to the capital markets. And
capital markets, mind you, are important to the economy for a very
important function: mobilisation of capital for investment purposes.
That adrenalin shot has become a standard part of any finance minister's
tool-kit. This year would've been no different-and indeed, markets
were buoyed by expectations of the Finance Minister dumping taxes
on dividends and long-term capital gains-had it not been for a single
significant diversion. The tension in West Asia.
That is why February 2003 demonstrated investor
behaviour that could best be described as 'aberrant'. The indices
did go up every other day (for a week or so, it did seem as though
the rally had kicked off in earnest), but never persistently enough
to develop the upward momentum needed to qualify as a proper 'pre-Budget
Overall, it was a story of fits and starts,
and the stockmarkets remained lacklustre, leaving the Sensex rangebound.
This index behaviour had an echo in the portfolio-churning
activity of the mutual funds, with not much heavy trading in any
particular stock-indicating a wait-and-watch stance by fund managers.
Caution was the operative word, and this showed in the trading.
|Of all equity-based schemes, over 95 per
cent gave positive returns in February with an average return
of 2 per cent
Yet, the month ended with sufficient reason
to smile, with the BSE Sensex having gained 1 per cent (however
modest, a gain is a gain is a gain) and Finance Minister Jaswant
Singh's buoyant Budget. No budget has been so well cheered in recent
years, and that, in itself, ought to act as a sentiment reviver.
February in Retrospect
Of all the equity-based schemes, more than
95 per cent gave positive returns with an average return of close
to 2 per cent. A small percentage, around a fifth of the equity
schemes, under-performed the Sensex in February.
The month's best performing sectors were information
technology and PSUs, with the BSE it index gaining 2.7 per cent
and the BSE PSU index gaining 2.2 per cent. But then, this is not
even half the truth. But for the budget, the story could well have
been very different. The tech story, particularly. Consider this:
till just a day before the budget, the BSE it index gave a negativ
return of -1.53 per cent between January 31 and February 27, but
it still emerged as the top performer by the end of the month, turning
in an absolute return of 2.7 per cent. The veritable U-turn is explained
by the declaration that the tax sops on it companies shall continue
(this was a fear that had subdued the sector through most of February).
The good news was declared early on in the speech, giving enough
time to the markets to respond positively. The PSU stocks did not
lag behind either.
The banking sector stocks continued their upward
march unabated. The sector's stocks witnessed a flurry of activity
with Andhra Bank maintaining its stock-to-watch-out-for tag. It
saw buying activity by three fund houses, with Canara Bank mf being
the major bull on the prowl. Similarly, other PSU banks, namely,
Bank of Baroda and Canara Bank, remained fund favourites. While
these banks gained, HDFC Bank and ICICI Bank two private sector
majors, saw the MFs paring their holdings just a bit. IDBI Bank
was at the receiving end, as the MFs put the stock to sword. PNB
and SBI too saw a slide in the holdings. Most of the selling at
these counters can be explained by profit-booking more than any
The bond markets fell sharply in February, with
the I-Sec Composite Index giving a negative return of -0.93 per
cent. This was just an extension of the trend that set in January.
The Iraq crisis and news of inflation creeping past the 5 per cent-mark
were the other factors driving yields up.
Outlook for March
There's the West Asian crisis to keep an eye
on, but by and large, March will take its cues from the Union Budget
for 2003-2004. The high fiscal deficit and the non-achievement of
disinvestment targets remain on top of the list of economic headaches,
but otherwise, the attempt to boost the capital markets is more
than evident. Long Term Capital Gains (LTCG) tax has been abolished,
and so has the tax on dividend income in the hands of investors.
Although the dividend announcement had a somewhat
neutral effect on the markets (perhaps because of the dividend distribution
tax), the LTCG tax abolition is surely a shot in the arm...even
if it's not strictly speaking applicable to assets held prior to
the start of the new fiscal year. The 'devil is in the details',
as they say.
In the first week of trading after the budget,
market indices have been declining with equities taking a beating
across the board. The debt markets got an early boost from the 100-basis-points
cut in the small savings interest rate, but yields have firmed up
again since then. Large investors are expected to be net sellers
in the month of March, as they have traditionally booked profits
|Barring any unexpected events in West Asia,
March will by and large take its cues from the Union Budget
Fund Manager Speak
Dilip Madgavkar, CIO, Prudential ICICI, opines
that the auto, banks and the power stocks would perform well in
the short to medium term, whereas the cement and it stocks would
be long term out-performers. In his view, the auto and auto-ancillary
units should do well, backed by the infrastructure projects. The
power stocks too, on steps taken towards power sector reforms. Banking
stocks would benefit from the "voluntary gilt buyback offer"
that would help the banks tackle NPAs.
Anil Sarin, Birla Sun Life AMC, spies a tempting
LTCG carrot that would exert downward pressure, as investors rush
to liquidate their holdings before the clock signals the end of
trading hours across the bourses, on March 31, 2003-just to buy
back the scrips later, thereby taking advantage of the LTCG tax
exemption. Further, adds Sarin, banking stocks would be in favour-propped
by the retail finance boom. Private sector banks would do rather
Sanjay Prakash, CEO, HSBC AMC, expects the
cut in surcharge to improve corporate profitability. "The budget's
physical infrastructure measures should benefit the power, cement
and metal sectors," he says, adding that the state-level move
towards the adoption of vat will boost trade and goods movement
within India by ironing out the existing fiscal patchwork of levies.
Whatever the misgivings some economists have,
the markets do look set for revival. The indicators include the
spurt in India's non-food credit offtake and the decreasing likelihood
of a unilateral war (if not of a war per se) in West Asia.
The US economy is the other thing to factor
in. It could very well resume its role as the world economy's locomotive,
if its liberal fiscal policies (having recorded a budget surplus
of $11 billion in January, the US has fiscal leeway) deliver the
desired results-in combination with monetary prudence. By the look
of it, dollar stability will not be an issue, unless a sudden crisis
were to hit the US on the external front (a risk the White House
must surely have taken into account).
It may be too early yet to pop the Champagne,
with the war eagles still soaring above West Asia, global opinion
still in flux and the jury still out on the fallout of war. But
with a little analysis and spunk, one could place an early bet and
win big on the stockmarket.