India – ‘Calm down dear, it’s just a correction’
Today’s Budget announcement by Finance Minister Mukherjee clearly fell short of market expectations. Indeed, the index move (MSCI India -5.8%) suggests not only disappointment but almost a policy blunder by the government in failing to address concerns over the economy’s fiscal stability. Most of the speech focused on the expenses rather than the revenue side of the balance sheet and many economists are fearful over a potential S&P debt rating downgrade. Equities, bonds and the currency slumped.
The decision to highlight growth as the key challenge facing the government has left investors scratching their heads, particularly given the improving economic outlook. Policy focused on private consumption in the form of tax breaks and state borrowing of 4.5 trillion rupees to fund spending on roads, power and aid for the poor. This has led to concerns over the country’s lack of fiscal discipline (Congress has upped its projected fiscal deficit to 6.8% of GDP for 2010). Other negatives were the absence of any rhetoric on the government divestment policy and foreign investment reforms in the insurance sector.
“It is our view that the Budget platform has been used as an opportunity to dampen sentiment and cool markets following the extraordinary gains from the March lows, paving the way for positive surprises further down the road.”
Nevertheless, the fiscal budget is perfectly manageable in the short-term and it is very likely that announcements to address the imbalances will be forthcoming over the coming months. The contrast in personalities of the current Finance Minister and his predecessor Chidambaram could not be greater. Chidambaram was both aggressive and pandered to India. Mukherjee is a conservative and has time on his side following the huge Congress victory six weeks ago. It is our view that the Budget platform has been used as an opportunity to dampen sentiment and cool markets following the extraordinary gains from the March lows (MSCI India up 86% before today’s sell-off), paving the way for positive surprises further down the road.
We therefore view today’s market move as nothing more than a correction in an ongoing rally. Today’s announcement was the perfect excuse for investors to lock in some profits and will likely be followed by momentum selling in the short-term. Should this be the case, we will look to increase our current India exposure from a 45% weighting currently towards a neutral position of 50%. There was plenty of positive news in the budget that has been overlooked, and selective names in power and infrastructure and the consumer sectors still look good value to us.
