Budget Analysis IV: Impact on Markets

The presentation of the Union Budget is a widely anticipated event for the markets. The markets seem to have given a thumbs down to the FM.

Equity Markets: Both BSE Sensex and the Nifty have shed 9.5% each in the first week after presentation of the Union Budget. In fact the Sensex recorded its largest ever loss in terms of points on the budget day. A deeper analysis reveals that the budget is not bad for the markets overall, but as the traders and speculators had built large positions ahead of the presentation of budget, the knee jerk reaction resulted in unwinding of those positions. Negative global cues also did not help matters in any way. It may be outrageous to put the blame on the Budget for the downfall. In fact the budget seems to be very positive for the long term growth of company profits by stimulating demand for their products. The high fiscal deficit of 6.8% of GDP is definitely a matter of concern for the FII's, as it has the potential to put pressure on the Rupee and the Interest rate scenario.

Bond Markets: Yields on bonds have moved up in the backdrop of huge Govt. borrowing programme to fund the expenditure of the Govt. The yield on benchmark 10 year Gilt bond ended the week higher at 6.97% as compared to 6.83% at the beginning of the week. Yields on corporate bonds have also witnessed an upward bias.

Future of Stock Market: The equity indices are close to the levels expected by me 13000 on the Sensex and 3900 on the Nifty. One cannot rule out a further decline of 5% or so from these levels, but equity investments have turned fairly attractive at these levels from the long term bull market point of view. I have a gut feeling that some new sectors will lead the next bull run. These sectors could be:

• Hospitality & Tourism: Considering the huge shortage of rooms in view of the forthcoming Commonwealth games 2010, and India gaining its rightful place in World tourism, this sector could be a fruntrunner in case of an early turnaround in the global economy.
• Media & Entertainment: This beaten down sector has all the portents of a spectacular bounce back, in the second half of FY 2009-10, when the world economy recovers from recession.
• Power & Energy (Specially non-conventional energy): Non-conventional energy such as Solar Power & Wind energy, as also Bio-diesel will be much sought after once Crude oil resumes its upward march.
• Domestic Retail: With real estate prices/rentals falling to reasonable levels, organised retail and consumer durable companies are in for good times. We are likely to see huge investments in organised retail in the coming months.

One can selectively invest into companies from the above sectors to ride the next bull run.