Budgets are documents that present intentions. Outcomes are measured. But quantification is only an ‘estimation’. It is a ritual that is like a Business Plan presented by a company. The one big difference is that a company’s accounts gets audited and you get to see the ‘actuals’. Governments have the privilege of not telling us about the actuals. There is an element of ‘fudging’ that comes through.
Anticipating a budget and wondering what impact it will have on stocks, is not a very healthy thing. A budget can at best tweak some small things, but cannot change big things. If a business is unprofitable, someone may manage to influence the government to impose some protectionist measures. However, that would be temporary. Any business that is vulnerable to changes in government policy, is only a temporary momentum play. I will not change my investment decision because of that.
Yes, we may re-rate some businesses if there is some lasting policy change. For instance, if the income-tax rates on companies are reduced to 25 per cent (as promised some time ago by the finance minister), the shares of full tax paying companies like a HUL or Colgate will become more valuable. We will go by a presumption that future governments will not disturb this adversely.
Tariff protection, infrastructure spends etc are temporary gains. Of course, we will think that the infrastructure spends are going to go on forever. A reality check will tell us that finding the money for that, plus the government expenditure plus all the freebies etc, is not an easy task. And in India, what I have seen is that most of the good things get anticipated before they happen. So, it is very unlikely that budgets will change things in a big way.
Reforms happen outside the budget. The budget is a financial statement. In any one particular year, there could be an increased thrust on any one or two sectors. Those give a temporary boost to that sector. Maybe a trading opportunity in most cases.
This budget comes when there is exuberance in the markets. Funds flows are very strong in to the market. Valuations are high. The one big consolation is that I am also seeing earnings growing at a healthy pace in most good companies. China has helped us in a big way by shutting down a lot of production units in many commodities. Since the last budget, we have seen the introduction of GST also. That should be a big boost for revenue collections also. Banks have yet again been bailed out at taxpayer expense and no long term remedy for the NPA problem is found. So this is a clean slate for the PSUs, but nothing has changed. Few more years to the next round of bail out.
Oil prices have just started to move upwards. It will have good and bad things for us. High oil prices is good for oil producing countries. This would help us get more jobs abroad and more remittances. However, the domestic finances will get badly affected.
Three years in a row, we had record low oil prices, but we have not improved our finances. The world had one of its best years in 2017 in terms of economic growth and we sat it out. Of course, we can blame it on GST, etc. Manufactu-ring growth is elusive. We have lost the race to China. Given the buoyant inflows and market sentiments, the budget will target fiscal deficit well within three per cent. That will be a good signal.
Employment creation is the biggest challenge. The government will try to address that with big spends on infrastructure. However, private investment is yet to kick off big and even if it does, it will take a couple of years before it can generate jobs. And today, the trend is to invest in businesses which need less people. Onerous labour laws are a big deterrent to risk taking. These reforms have to come outside of the budget.
As an investor, what I will look for is whether it creates a buying opportunity or a selling opportunity. Selling opportunity, may simply mean that I do not want to buy anything. A buying opportunity is when there is disappointment and sell off due to a budget and I can buy some quality stocks at better prices.
Let us take for example, the issue of Long Term Capital Gains Tax. The market may not like it. However, it does not make equity shares any less attractive, given that there are no comparable options. People will still buy equities. Some foolish number crunching deba-tes will happen as to whet-her people will sell off stocks to time their capital gains tax, etc. If there is a sell off because of that, keep your cheque books ready. However, it is unlikely that the government will do anything at this stage, to spoil the sentiment (however irrational it may sound). 2019 is an election year. The next budget will be just a vote on account. So, the government will try to please everyone.
As an investor, I am neither enthused nor worried about this budget. I still find it difficult to spot investment opportunities at reasonable prices.
(The writer is a veteran investment adviser. He can fsreached at balakrishnanr@gmail.com)
