Approach of reveue-scratch than revenue-build from capacity is worry
Budget2016 has played to the gallery of systemic sensitive group of external stakeholders (global rating agencies and offshore investors) and internal stakeholders (urban, semi-urban & rural poor, middle class population and the RBI) with focus on infrastructure-build, capacity expansion in agricultural sector and improvement in social well being.
Global rating agencies and RBI will be too pleased with the Government sticking to FRBM agenda retaining FY17 fiscal deficit target of 3.5% and if this not enough to bring cheer, the vision target of 3% by FY18-FY19 is pulled into the mind if not into the radar. The budgetory allocation for agriculture & allied sectors, infrastructure and better facilities at under developed areas are music to the ears of majority of the vote-sensitive population. The positive take-away from this intent are (a) retain stable to positive India outlook and keep the upgrade hope alive in FY17 (b) enable RBI to deliver 25 bps rate cut on or before April policy review and provide bandwidth to shift policy stance from accomodative to growth supportive stance (c) capacity expansion in agriculture sector building aspiration for higher contribution to the GDP and resultant employment & wealth creation in the rural & semi-urban geographies, and (d) re-balance consumption between urban and rural with intent to bridge the gap between rich and the poor leading to improved social standards & security.
Some of the weak links are from (a) no tangible solutions to emerging crisis and credit risk-off sentiment in financial intermediation sector (b) limited efforts to pull private capital as top up for public investments (c) risk of consumption squeeze in the super rich to affordable middle income group, and (d) no clarity on how the fiscal deficit target will be met on steady GDP growth momentum at 7-7.75% target. Given that the contribution from direct taxes from the target segments will be low, the Budget2016 has opted to scratch more from the existing high tax payers. The FRBM compliance through taxing the rich and not from from revenue-build from capacity expansion and improved bottom-line efficiency stands out as black mark.
All taken, Budget2016 is a street-smart one providing priority to systemically sensitive issues rather than important agenda. BJP is known for delivering pleasant surprises taking out the hidden magic wand when things looks extremely tough. The worry is from the short term (and sighted) approach, which provides immediate relief but keep the long term visibility unclear. Given the extreme uncertain global environment, this crisis management (and keep-good, and not feel-good) Budget2016 deserve appreciation with 6.9/10 rating!
What is the impact on India markets?
It is big relief for Money & Bond market. There were signs of RBI throwing in the towel against heavy tides. 10Y (old) benchmark 7.72% 2026 hit 8.10% and new benchmark 7.59% 2026 in struggle at 7.80%. To rub salt into the wounds, short term rates moved higher from usual end of FY16 balance sheet build-up with higher demand for deposits. The FRBM agenda of 3-3.5% in FY17-FY19 is manna from the heaven to RBI, and big relief to Banks that were staring at huge provisions in the investment portfolio. MARKET PULSE strategy was to stay in duration-build mode when 7.72% 2025 at 8-8.10% completing the chase from 7.50-7.65% duration-cut zone. It is now repeat of history phase enacted during October 2015 - February 2016, when 10Y benchmark moved up from 7.45-7.50% to 8.05-8.10% post delivery of 50 bps rate cut on 29th September 2015. The major positive take-away from the Budget is lower net market borrowing at 4.3 lac Crores and 25 bps rate cut demand from RBI on or before April review. The downside risks are from demand-supply mismatch in FY17 and FED next round rate hike in June, if not in March. It is also to be seen how RBI will defend 6.5% Repo rate against 5.75-6% CPI by March 2016. However, with FY17 CPI target at 5% and Rupee recovery from 68.70-68.85 to 68-68.20 will provide RBI the necessary bandwidth (and defence) to deliver 25 bps rate cut. Given these dynamics in play, India 10Y benchmark bond 7.59% 2026 range focus is set at 7.50-7.65% reviewed down from previous 7.60-7.85%, which has already seen back-and-forth since issuance in 2016. It would be good opportunity for investors of 7.72% 2025 at 8-8.10% for exit from OMO bond purchase at 7.65-7.80%. For now, ahead of RBI rate cut it is good to hold entry at 7.75-7.80% and accumulate at 7.65-7.70% for exit at 7.45-7.50%.
MARKET PULSE set post-budget NIFTY trading range probability of 7100-7350 (40%), 6850-7100 (40%), 6600-6850 (15%) and 7250-7500 (5%). It is pleasant surprise that all is done. From low of 6825 (momentary punch below 6850), NIFTY shifted focus at 7100-7350 not ruling out stretch into 7500-7600. Will this momentum stay as counter trend recovery or has shifted to bullish trend for 7600-8000? It is tough question to answer at this stage when external cues continue to stay resistive. MARKET PULSE 2-step value-buy (out of 3) at 7000-7035 and 6850-6885 held rock solid, and break of 7200-7215 takes focus into 7350-7600. It is good to hold precious enreies and accumulate at 7085-7120 for 7350-7600, where good to cash out and take money off the table. There is no clarity now beyond April-June, hence good to keep the focus short and be fleet-footed for now. It is tough for NIFTY to break the monthly lower high trend when 7972 (Jan) and 7600 (Feb) is distant away. The comfort however is from getting out of lower low cycle 6869 (Jan) and 6825 (Feb). Will 1st March low of 7035 stay safe? No clarity as yet, hence the stop here for strategic investors while being in chase for 7350-7360
Bank NIFTY held at 2-step value-buy zone of 13650-13800 and 13350-13500 and got a over 7% rally from the 29th Fenruary low of 13407 into 14350-14500. Here again, it 2016 high of 17067 (Jan) and 15565 (Feb) is distant away, while the lower lows trend is seen to be broken as Feb low of 13407 is also out of the radar. It is high probability that 1st March low of 14064 remains firm. The strategic play is to hold buy entered at 13500-13750 and accumulate at 14100-14150 for being in the chase beyond 14550-14700 enroute to 15000.
Over all, investors will stay risk-on in buy dips mode looking for exit ahead of rate cut event. The play is from feeling the pulse of RBI. There are no clarity from the macroeconomic fundamentals for shift into bull phase. Till then, see this as counter trend recovery, thanks only to Budget2016 powered by Arun Jaitley.
Good luck and happy trading!
Moses Harding
harding.moses@gmail.com
9674734145
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