|»5 Minute Wrap Up by Equitymaster|
On This Day - 17 FEBRUARY 2014
UPA's last attempt to woo voters
In this issue:
As markets and rating agencies eagerly watch out for fiscal consolidation carried out ahead of the upcoming elections, the Finance minister reported a fiscal deficit of 4.6% of the gross domestic product (GDP), lower than his initial target of 4.8%, helped by a massive cut in expenditure and gains from telecom spectrum auction. He has also pegged next year's fiscal deficit at 4.1%. Current account deficit (CAD) will also be contained at US $45 bn. However, once the details of the fiscal deficit number are out then only the credibility of the fiscal policy statements can be ascertained. This is because the government has used many accounting tricks to bring the deficit number down.
The FM certainly deserves credit for not presenting a populist budget. The FM did not roll out freebies but the subsidy bill of Rs 2.4 trillion is likely to be another underestimate - for it is almost the same as this year, when Rs 350 bn has been rolled over. The FM has also cut excise duty on capital goods, bikes, cars and SUV. This will help consumption to pick up.
The FM has bravely tried to paint a rose pink picture of the economy. This is even as the major bottlenecks for growth remain. Chidambaram might win kudos for meeting the twin deficit target this year, but he has left a deep hole for the next government to fill. The next government needs to focus on key sectors which form an imperative part of our economy and overall growth of the country.
As far as stock markets are concerned, a budget without any major decisions on reforms is unlikely to have any effect on long term fundamentals of the economy. Hence, one would be better off not focusing on it too much. Attention should instead be paid to the fundamentals of the company and the valuations that it is trading at.
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Take the steel sector for instance. During the last couple of years, the sector has witnessed a severe slowdown. On the other hand, input prices have been increasing steadily. This resulted in a significant squeeze in the profit margins of steel players.
When will the steel sector turnaround? If you were to go by the views of the chairman of the largest domestic steel player SAIL, C S Verma, the worst seems to be behind for the sector. What is his rationale? As per him, steel prices have gone up slightly in recent months owing to improvement in demand. Inventory levels have also receded.
We would like to take his views with a pinch of salt since the poor business environment and the political uncertainty continue to remain major challenges that could jeopardise chances of a quick revival in the economy.
The performance across sectors remained mixed though. While pharma and auto seem to have performed relatively better, cement and metal companies continued to face pressure. Overall, there still remains an element of uncertainty with respect to a meaningful recovery in the forthcoming quarters. It seems quite likely that there won't be much improvement before the general elections. Post the elections, the agenda set out by the new government could determine the timing and pace of the recovery.
So, if we were to start in the year say 1972 and were to invest in an economy where the GDP growth was highest in the past five years, this strategy would have returned a decent CAGR of around 15%. However, if investments were made in the economy with the slowest growth record, investors would have earned much higher 25%!
This clearly shows that starting valuations matter a great deal. Countries which have grown the fastest in the last five years also have their stock markets bid up accordingly. However, the ones with the lowest growth rates also have cheaper valuations and thus they tend to offer higher subsequent returns. Interesting to know that approaches that work in bottom up stock picking also has its applications when taking an economy-wide call. And why not. Human nature remains the same whether one prices assets top down or bottom up, isn't it?
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