Investonomics-ManFina-Series 11

As I write today with Nifty@5350 almost the same level at which I had written my previous blog with various strategies to be followed as it was a period of various events falling in line. The latest event i.e. our Union Budget which came on 16^th March 2012 was as per my expectation which I have highlighted in my previous blog that this budget is going to be a highly inflationary budget. Various indirect taxes were raised and a little were given to public in terms of raising Income tax slabs.

As mentioned in my previous blog that I expect this budget to be negative for majority of Sectors barring Agriculture and FMCG.A bit was spoken about Infrastructure sector as Govt allocating RS 50,000 crores for this sector and out of this Govt wants at least 25,000 crores to come from private sector, meaning thereby Govt would contribute only 25,000 crores. I feel this allocation of Rs 25K crores to be too little for country with 125 crores of population. A reasonable estimate for investment needed alone in power sector is Rs 10 lac crores in next 8 years if we want our country to be self sufficient in terms of giving power to every individual. So if Government believes that they are going to give proper infra to their citizens then this figure of 25000 crores which they have given in this budget is too little or negligible. And also who is going to put another Rs 25K crores in this highly inflationary environment and in current high interest rate scenario. For last 2 years now there are no news on Project expansion and new capital formation. Curse to Global Economy or Higher interest rates for this but this is the truth

Unfortunately this budget neither allocated appropriate funds for current development nor gave any vision for further development in Infra sector investment.

Looking to the amount allocated for infra sector and lack of vision for further investment I am forced to assume that investors should exit Infra sector for at least next 2 years. As an investor we should exit investments in this sector as I believe Infra companies will not be able to get positive cash flows from this sector as their basic raw material Cement & Steel prices are going to go up whereas Interest rates are not going to come down aggressively in next One year as Inflation is going to stay for a longer period. The reasons why Inflation is going to stay for a longer period are:

1. Fiscal Deficit-As per budget Govt would contain Fiscal Deficit to 5.1% of GDP which doesn’t include Rs 2 Lac crores Food Security Bill. The same Government projected 4% Deficit target in 2011-12 and ended at 5.9% Debt to GDP. So with reasonable certainty even if Govt says that they are going to contain the deficit to 5.1% without including Food Security Bill then what would be the status if this is included, we know it all. Higher the deficit, higher will be money printing and higher will be the inflation. One should remember that High Inflation is Negative for Equities barring FMCG sector and Positive for Real Estate, Gold or anything which is not money but Money’s worth.

2. Crude-As indicated in my previous blogs if Crude prices remain high because of rising Geo Political risks then being a net importer of Oil we may face unexpected High Deficit and a depreciating Rupee. Also current trend in rupee suggest we may see Rupee around 54+ levels shortly. This will be again negative for Equities as an asset class for investment.

3. Election-The latest reason is Governments own credibility and standing in Parliament. Looking to the kind of threats the government faces for getting resolutions passed we may also see unexpected event in the form of early Loksabha Poll or Third front forming government. This event can be very disastrous for Equity markets in India. Global cues may remain strong as US is recovering but we have to look into our pockets first.

So, overall we can say the risk reward ratio is highly negative for investment in Equity as an asset class. The current scenario will be very positive for Exporters and equally tough for importers (mostly Capital Goods Sector).Equity markets may fall at least 10-15% from current levels in next 3 to 6 months where we may see some value buying to happen. There are many more points in this Budget whose repercussions needs to be discussed and highlighted which I will do in my next blog. Till then enjoy investments in Debt Markets, Gold and Properties & reallocate in Equities.

For Asset allocation strategy and further advisory, you may contact me on my mail manfinacorp@gmail.com