The B-day finale: Anxious industrialists gathered at CII's Delhi headquarters to view the FM's Budget speech

February 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 rally'.

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.

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 other reason.

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 at year-end.

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 well.

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.

Placing Bets

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.