Look Ahead, Stay Invested

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At a point of time when the global economies aren’t doing particularly well and are not expected to improve in a great hurry, the finance minister seems to have taken a gamble of boosting domestic consumption by spending money for the expansionary policies. Prima facie it looks like a law and logic scenario but the fact of the matter is that about 38 per cent of our economy is related to the external sector and about 65-70 per cent of our external trade is with the US, Europe and Japan. It’s obvious that this bit of our economy isn’t likely to do a great deal in the coming year. So what you have to do is to try and repair the remaining 62 per cent of the economy that is domestically driven.

Therefore the focus has indeed been on boosting the domestic demand. The incentives which were earlier given to the industry have not been withdrawn. Furthermore, fresh tax incentives have been given to the earners or the individuals of the economy. And a huge amount of emphasis has been placed on rural spending and development. However, it still remains to be seen how well the plans get executed and secondly, whether they indeed create productive infrastructure in the rural sector.

I think under the circumstances when the entire global economy is looking to expand its balance sheet, India particularly doesn’t seem to be doing anything different. The only difference in India’s case is that we have started with a high deficit and additionally, we are spending a bit more money. So the budget can be argued both ways but I would say that the thrust is on the path of taking ahead the economic growth rather going into a the shell and doing fiscal consolidation. What has helped is that there have been no announcements in the budget that have gone against market expectations. As such, there is no dissatisfaction about what has been presented in the budget but it is rather about what has been left out.

But what has not been done can be executed later. In that sense, the easier part is being tackled now while the difficult one will be taken up for consideration a little later. I don’t see any significant negative impact of this budget on corporate earnings and these are expected to display more or less neutral growth as compared to last year. In general, the domestic demand is likely to get the push and get positively impacted by the budget. This will gradually improve the corporate earnings. There has been some improvement in the operating environment as compared to Q4FY09 and so we would see a slight improvement in corporate earnings on a QoQ basis, though on a YoY basis it wont be particularly great. The triggers for growth would be the international markets and any further announcement from the government. Investors shouldn’t expect the market to run up sharply in the immediate future as there are still some concerns on the economic slowdown front. However, equity markets are attractive both in terms of valuations and India’s long-term prospects.

One should therefore follow a disciplined approach in terms of asset allocation and once that is done, one should systematically invest in the markets through SIPs or buy on declines. Buy dips and stay invested for a certain period of time. India Inc is doing better than the rest of the world, companies are in good shape, the capital market, risk appetite and liquidity environment in general is improving and therefore all this put together makes sense to invest and stay invested.