The Budget and beyond.

A budget is an annual event and volatility is its constant companion. The interesting thing about budgets is that expectations are running very low in recent years. The markets have stopped seeing budgets as catalysts of sentiment overhaul. At best, the budget is an opportunity to make a few bets and see where they go. Sentiment doesn’t change drastically after the budget if the expectations run low. There is always the possibility of low expectations getting surpassed. When this happens, a relief rally occurs taking stock prices higher. With an election year ahead, the markets expect this budget to be more welfare driven and vote-bank centric. Reform expectations are running low. This is a great opportunity for the finance minister to exceed expectations. The possibility of this happening is high and we expect the markets to overreact if it sees adequacy of reforms. Market fears descend on investor’s minds every year and the usual fears of higher taxes, draconian moves on capital gains, and the possibility of a rating downgrade dominate public thinking. Just not doing too many harsh things and packaging the budget intelligently should win enough kudos to the Finance Minister. Being an experienced hand at packaging budget, he can’t afford to do too badly. The odds are clearly in his favor. All he needs to do is to play his hand sensibly.

“You can’t predict it. You can prepare.” – Howard Marks.

Invest speak:

Profiting from a bull run inevitably starts at the other end of the cycle. In the bear market, when no one else wants to buy, discerning investors spend their time diligently buying quality stocks. Equity bought in bear markets always delivers outlier returns in the bull markets. While discerning investors ensure they buy enough equity in bear markets, the majority simply watch out the bear markets. The reason is that they are uniformly fearful and risk-averse. Once fears recede and markets start rallying, these investors remain equity averse and tend to exit stocks on every rally. They wait, expecting the markets to fall again. The markets tend to form higher tops and higher bottoms giving little or no buying opportunity to the waiting investors. This year should see a trend where the markets tend to be on a gradual ascent from its previous bottom with several intermittent rallies and corrections. The economic fundamentals will improve only in a gradual and phased manner and the markets will take cognizance of positive developments. Moderating one’s pessimism and taking cautious exposure is the only option before investors wanting to return to markets. The trick is to invest in time before economic fundamentals decisively improve. Being ahead of the economic cycle is a prerequisite to making your equity investing work.

Think beyond the budget. Take stock and move on.

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