INVESTMENT STRATEGY

BSE Sensex vs. KFL 75

Budget is an annual event, wherein the government sets the path for its next course of action. Capital markets are firmly integrated with this process. The linkage of a company or sector valuation is on its future performance, wherein budgetary measures pertaining to indirect taxes make a difference.

Successful corporates have been able to overcome this yoke by proactive growth management and prudent cost control measures. These corporates operate globally, with a high degree of success in their chosen lines of business. A protected economy till the late '80s, ardent purveyors of the protectionist regime are now realizing the importance of a free market. They have at last woken up to the realities of a buyers market (a far cry from the comforts of a sellers market, which was prevalent till the recent past). It is in this context, we would be presenting our investment strategy for the Budget This strategy is purely a short-term ploy.

· The worst hit would be high tax paying companies and those companies still dependent on tariff barriers. In other words, these would be commodity sector players and large India centric players.

· Export oriented companies with relatively low import dependence would stand to gain from the budget.

· The preferred portfolio mix is: 30% cash, 30% in the still undervalued old economy stocks and 40% in new economy stocks.

· While investors can safely stay long on aluminum, copper and PSU stocks, from budget perspective, we recommend fresh entry at lower levels in large capitalization software companies, for maximizing gains.

We expect the BSE Sensex to remain range bound between 3950 and 4850.

Pre-Budget Analysis: Overt and Covert Action Called For.

Ever since liberalization, the Budget has been one of the most eagerly awaited activities of the Central government. On one hand, it sets the tone for the economy in the following year. On the other, it also provides astute traders in the stock market with an opportunity to take advantage of over expectations in the run up to the Budget (invariably there has been a run up prior to the Budget). Unlike earlier Budgets, the expectation this time around is muted. The Gujarat earthquake was a big blow and people seem to have accepted sharing the burden as a fait accompli. But one cannot write off the chances of something incredible. The previous two Budgets turned out to be damp squibs when a lot of expectation was factored in. But this time around, there are clear (but weak) signals that the government means business and would exercise a few more options to get around a crisis. The capital markets are clearly looking for positive drivers. The earthquake at Gujarat has limited the options for the FM, though he is putting on a brave front. Some bold measures heralding the second stage of reforms and a tactful coercion of state governments to put their house in order can be expected are called for.

On track till fate willed otherwise: If one were to go purely by variance analysis, the performance of the government vis a vis the Budget would have been exemplary had the Gujarat earthquake not intervened. From the data available till December, the performance seemed to be in keeping with the targets at least in the case of the most critical parameter - fiscal deficit. The fiscal deficit appeared to be in tune with the Budget estimate of 5.1% of GDP. This would have been all the more commendable as the target would have been achieved on a much slower economic growth rate - the CSO has recently revised the GDP growth rate downwards from 6.5% to 6%. The significance of the achievement is all the more laudable considering the track record during the past few years.