Two Themes to Profit from the Budget - The 5 Minute WrapUp by Equitymaster
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Two Themes to Profit from the Budget

Jan 31, 2017
In this issue:
» Government's dual challenge on Fiscal deficit and Fiscal consolidation...
» Does Vodafone-Idea merger means consolidation in the telecom industry....
» ...and more!
00:00
Kunal Thanvi, Research analyst

I don't envy Arun Jaitley. In less than 24 hours, our finance minister will present the Union Budget.

He has his work cut out. As usual, expectations are high. But that's not the problem.

The problem is that expectations, this time, seem contradictory. Reading the news could leave you confused.

With the UP elections just around the corner, the markets are not sure what to expect. So I thought it would be a good idea to write to you about some big themes in the budget that could affect your stocks.

The Fiscal Deficit and Financial Stocks

The fiscal deficit is the difference between what the government spends and what it earns. The difference is covered by borrowing.

The FM has always stated that he wants to keep the deficit in check. To his credit, he has done it...so far. Today's chart provides more details.

But what happens when push comes to shove?

We remember what P Chidambaram did. He waived off farm loans and widened the scope of MGNREGS.

The result?

High Inflation. High interest rates. Slow growth. In other words, stagflation.

Demonetisation has hit the unorganised sector and rural India hard. There is a clamour for some relief for the poor rural folk.

If history repeats, the deficit would go up. India's sovereign rating would come under threat. Interest rates would rise.

Financial stocks typically don't do well in a rising interest rate environment. The banking index is up about 10% since the last week of December 2016. Markets haven't factored in this risk.

We believe you would be wise to do so.

Have You Been Playing the Defence Theme?

This is a recent phenomenon. After the surgical strikes across the LoC in September last year, there has been considerable interest in the defence sector.

There aren't many stocks in this space, but I couldn't help notice a certain Reliance group stock is up about 25% in the last few weeks. Other indirect defence plays, like L&T, are up about 10% recently.

This is a high risk play.

There is absolutely no guarantee that the FM would make a big announcement about private sector participation in the defence sector. Even if he did, buying individual stocks in anticipation of high future profits is just crazy.

Buyer beware.

'Digital India'

Going cashless is the hot topic these days. A couple of weeks after demonetisation, a stock of an electronic peripherals company caught the fancy of the markets. The stock doubled in no time.

The reason?

It manufactures devices that process credit and debit card payments.

If Jaitley announces schemes and subsidies that give a big push to Digital India, stocks in the software/electronic hardware space could get a short-term boost. I believe something to this effect could happen.

So What Should You Buy?

Of course, these aren't the only themes to watch out for. The FM could spring a surprise and trigger a frenzy in a completely new sector.

So here's my suggestion. Ignore the budget.

Well, not completely of course! I mean ignore the short-term impact it will have on the market...whether positive or negative.

Focus instead on two broad themes.

First, the sectors and stocks that would be positively affected in the long term by any major announcements in the budget. I'll write to you about these after I read the fine print of the announcements.

Second, consider those sectors and stocks that won't be affected by the budget. You may not get short-term gains here but you could find good long-term value in them.

Ask yourself these questions.

Which stocks are the market currently ignoring?

What are the unloved sectors?

Which stocks are falling for reasons other than the budget? Is the fall justified?

As Ankit wrote to you yesterday...

  • The best time to invest in the Indian stock markets is when you find value. Whether you find that before the budget or after, it doesn't matter.

But if you want to buy stocks that will outperform in the long term, irrespective of what happens in the budget, I recommend you have a look at the Top Stocks from Richa's Hidden Treasure service.

You won't be disappointed.

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------------------------------

03:45 Chart of the Day

One of the important yardstick to measure the financial health of an economy is Fiscal deficit. It is the difference between the government revenues and expenditure. The difference is generally bridged by debt. The present government is committed to reduce the gap. The long term fiscal deficit target is 3% of the Gross domestic product (GDP). This simply means relatively less expenditure. Hence, less government spending.

Fiscal Deficit target of 3% of GDP


In last one decade India is making serious efforts to reduce the fiscal deficit level. Ever since, the new government came in it has been in favor of fiscal consolidation and meet the long term fiscal deficit target of 3% by FY17-18.

Mind you, the recent demonetisation has resulted in a slowdown. Further, government has announced flurry of projects but execution is still pending. This means the government needs to relax its spending to spurt the growth again.

This means, once again, the government needs to fight dual challenge. First, maintaining its stance on fiscal consolidation and sticking it fiscal deficit target of 3% of GDP for FY17-18. Second, it must relax the deficit target for reviving the economy from the shock of demonetisation.

With elections in Uttar Pradesh and preparing the ground work for 2019 election it would be interesting to see what stance government takes Fiscal consolidation or Fiscal deficit.

04:20

In September 2016, Reliance Communications became fourth largest telecom player in the country after the acquisition of Aircel. The debt laden telecom industry in India showed first sign of consolidation.

The consolidation in the industry, would lead to some improvement in financial health of the company. The improvement would be on the back of revenue growth, moderation of competition (tariff stabilization), boost in the customer experience among others.

The recent entrance of Reliance Jio has resulted in falling market share for big players like Airtel and Vodafone. Both players are losing market share. This is no short of a disruption.

One of the important reason for Vodafone- Idea Cellular merger is the intense competition from Jio. If deal gets through the combined entity would become the largest telecom player in the country leaving behind Bharti Airtel.

According to an article in Economic times, the merger of this scale between second and third largest player would result in a complete restructuring in the telecom sector.

It would pare the industry with three dominant players, which would progressively ease competition in the intensity. Further, it would also result in serious investments in technology and customer experience which players with mid-size balance sheets were not able to do.

That said, the industry has lowest switching costs, no pricing power. The ever changing technology and spectrum auctions will always require high investments. This means more debt and a big question on the improvement in the financial health.

The consolidation will result in better customer experience, however, it would be interesting to see will it really help in the balance sheet consolidation.

04:45

After opening the day in red, the Indian share markets have continued to trade on a negative note. Sectoral indices are also trading on a negative note with stocks in the IT sector and oil & gas sector witnessing maximum selling pressure.

The BSE Sensex is trading down 134 points (down 0.5%) and the NSE Nifty is trading down 49 points (down 0.6%). The BSE Mid Cap index is trading down by 0.6%, while the BSE Small Cap index is trading down by around 0.5%.

04:55 Today'sInvesting Mantra

"Be fearful when others are greedy, be greedy when others are fearful" - Warren Buffett.

This edition of The 5 Minute WrapUp is authored by Kunal Thanvi (Research Analyst).

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1 Responses to "Two Themes to Profit from the Budget"

Sajid

Jan 31, 2017

What is new in this letter. Every one knows what is in surrounding.
Write few lines, no one has time to read lengthy mails which finally ends to subscribe another scheme for more details.

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Equitymaster requests your view! Post a comment on "Two Themes to Profit from the Budget". Click here!
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