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India Equity Strategy
Budget Preview: Message over Mathematics
Fiscal maths is important — This will be closely watched: a) Fiscal consolidation:
Can the deficit really get to 4.8%? b) Social spending: More, but by how much? c)
Tax breaks: Is there enough in the kitty? d) Asset sales – How much this time?
While FY11 fiscal should outperform by 20/30bps (5.1%), there’s little room to
wriggle in FY12: a 5%+ deficit target will disappoint, sub 4.8% level would
positively surprise; but the details/assumptions will matter.
But the Budget’s message is critical — With the backdrop of policy/political and
macro pessimism, we believe the budget’s message is more critical than its
means. This reads - aggressive policy measures (resources policy, infrastructure
spend/execution, FDI, agriculture initiatives and transparent/speedy approval
processes), credibility – deliverability and timeliness, and the government’s
intent/body language will determine market reaction. ‘Body language’ is hard to
judge, but do look for it.
Micro more moderate — Implications for sectors/companies have continued to
diminish with time, but they still matter. Sectors that could see potential upside
(more detail below): capex-related, oil & gas, real estate; and risks for autos,
metals and consumer stocks. We see a more investment-oriented bias – including
easier and cheaper financing, some consumption sops (possible Income tax
relaxations), and an aversion to touch inflation-inducing taxes.
Will the budget budge the market?— History: 10-yr (+1 month) performance –
average (-1.2%), extremes (+9%/ -11%), up/down years (4/7), and the last two
years have been strong (7.4%/ 6.8%). It’s the policy/regulated/consumer sectors
that have historically swung more: metals, energy and consumers on the upside,
cap goods and banks on the downside. This time: 1-month market performance
leading into the budget (-2%) has been weaker than the average (+0.6%), but last
week’s strong gain (+6%, led by banks and cap goods) could suggest some
expectation build-up and, consequently, disappointment risk.
Budget and the market
The budget does matter, though probably a little less so over the years. In part
because India is now a less Government-dependent economy now (albeit this
assertion is a little questionable over the recent past); in part because
Government data are now available on a more frequent basis – so minimising
historical surprises, and because a lot more policy decisions are taken outside
the budget. But it’s not quite a non-event yet - it does impact the market,
influences mood and the market does wait for it, in good years and not so good
ones such as 2011.
Its specific impact on the market is moderate on average: however, market
performance 1-month post budget has been negative more often than positive
(up/down years: 4/7). While for the last two budgets the market was up (7.4%/
and 6.8% respectively), pre-budget market performance has seldom been a
good indicator of what follows the budget, and so it is hard to play this event
logically.
We would note that this year’s 1-week up-move into the budget has been the
strongest in the last decade (with a 1-week adjustment, given that there is a
week between now and the budget). While this is possibly in part because of a
very weak market leading into the budget (-14%YTD at peak), it does suggest
that some expectations of a positive budget are being baked into the market
and could indicate some risk if the budget is a flat, harsh or uninspiring (read
poor body language).
Fiscal Mathematics
Budget Backdrop – Challenging Macro Environment
The backdrop to the FY12 budget, due to be announced on 28 Feb, is a
challenging one. This year, the Finance Minister must reckon with rising fuel
and food prices, and the persistent problems of high current and fiscal deficits,
meanwhile keeping the populace happy, given upcoming state assembly
elections. While a government weakened by corruption scandals has resulted
in popularity slipping down the charts, making the attraction of populist
measures all the more tempting, the FM needs also to steer the deficit down in
keeping with 13
th
Finance Commission recommendations.
FY11 Deficit Outperformance Priced In …
A fact now well-priced in is that, due to higher nominal GDP and buoyancy in
revenues offsetting supplementary expenditure, the deficit in FY11 is likely to
see some improvement from 6%+ in FY10. Incorporating the advance GDP
numbers (nominal GDP growth of 20.8% v/s budgeted 12.6%), the fiscal deficit
target for FY11 stands at 4.8% v/s the 5.5% budgeted. Depending on the extent
of higher subsidies, we expect a print of 5.1-5.2%.
… But Risks to Consolidation Loom in FY12
The picture is not likely to be as bright in FY12. In fact, a combination of factors
both on the expenditure and revenue front could result in the pace of deficit
consolidation being stalled, possibly even making the 4.8% target set out by the
13th Finance Commission Recommendations difficult to achieve.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Equity Strategy
Budget Preview: Message over Mathematics
Fiscal maths is important — This will be closely watched: a) Fiscal consolidation:
Can the deficit really get to 4.8%? b) Social spending: More, but by how much? c)
Tax breaks: Is there enough in the kitty? d) Asset sales – How much this time?
While FY11 fiscal should outperform by 20/30bps (5.1%), there’s little room to
wriggle in FY12: a 5%+ deficit target will disappoint, sub 4.8% level would
positively surprise; but the details/assumptions will matter.
But the Budget’s message is critical — With the backdrop of policy/political and
macro pessimism, we believe the budget’s message is more critical than its
means. This reads - aggressive policy measures (resources policy, infrastructure
spend/execution, FDI, agriculture initiatives and transparent/speedy approval
processes), credibility – deliverability and timeliness, and the government’s
intent/body language will determine market reaction. ‘Body language’ is hard to
judge, but do look for it.
Micro more moderate — Implications for sectors/companies have continued to
diminish with time, but they still matter. Sectors that could see potential upside
(more detail below): capex-related, oil & gas, real estate; and risks for autos,
metals and consumer stocks. We see a more investment-oriented bias – including
easier and cheaper financing, some consumption sops (possible Income tax
relaxations), and an aversion to touch inflation-inducing taxes.
Will the budget budge the market?— History: 10-yr (+1 month) performance –
average (-1.2%), extremes (+9%/ -11%), up/down years (4/7), and the last two
years have been strong (7.4%/ 6.8%). It’s the policy/regulated/consumer sectors
that have historically swung more: metals, energy and consumers on the upside,
cap goods and banks on the downside. This time: 1-month market performance
leading into the budget (-2%) has been weaker than the average (+0.6%), but last
week’s strong gain (+6%, led by banks and cap goods) could suggest some
expectation build-up and, consequently, disappointment risk.
Budget and the market
The budget does matter, though probably a little less so over the years. In part
because India is now a less Government-dependent economy now (albeit this
assertion is a little questionable over the recent past); in part because
Government data are now available on a more frequent basis – so minimising
historical surprises, and because a lot more policy decisions are taken outside
the budget. But it’s not quite a non-event yet - it does impact the market,
influences mood and the market does wait for it, in good years and not so good
ones such as 2011.
Its specific impact on the market is moderate on average: however, market
performance 1-month post budget has been negative more often than positive
(up/down years: 4/7). While for the last two budgets the market was up (7.4%/
and 6.8% respectively), pre-budget market performance has seldom been a
good indicator of what follows the budget, and so it is hard to play this event
logically.
We would note that this year’s 1-week up-move into the budget has been the
strongest in the last decade (with a 1-week adjustment, given that there is a
week between now and the budget). While this is possibly in part because of a
very weak market leading into the budget (-14%YTD at peak), it does suggest
that some expectations of a positive budget are being baked into the market
and could indicate some risk if the budget is a flat, harsh or uninspiring (read
poor body language).
Fiscal Mathematics
Budget Backdrop – Challenging Macro Environment
The backdrop to the FY12 budget, due to be announced on 28 Feb, is a
challenging one. This year, the Finance Minister must reckon with rising fuel
and food prices, and the persistent problems of high current and fiscal deficits,
meanwhile keeping the populace happy, given upcoming state assembly
elections. While a government weakened by corruption scandals has resulted
in popularity slipping down the charts, making the attraction of populist
measures all the more tempting, the FM needs also to steer the deficit down in
keeping with 13
th
Finance Commission recommendations.
FY11 Deficit Outperformance Priced In …
A fact now well-priced in is that, due to higher nominal GDP and buoyancy in
revenues offsetting supplementary expenditure, the deficit in FY11 is likely to
see some improvement from 6%+ in FY10. Incorporating the advance GDP
numbers (nominal GDP growth of 20.8% v/s budgeted 12.6%), the fiscal deficit
target for FY11 stands at 4.8% v/s the 5.5% budgeted. Depending on the extent
of higher subsidies, we expect a print of 5.1-5.2%.
… But Risks to Consolidation Loom in FY12
The picture is not likely to be as bright in FY12. In fact, a combination of factors
both on the expenditure and revenue front could result in the pace of deficit
consolidation being stalled, possibly even making the 4.8% target set out by the
13th Finance Commission Recommendations difficult to achieve.
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