Keep equal mix of large, midcaps in portfolio for stability with higher returns: HDFC Securities

A. In the first eight months itself, the government has reached 115 percent of the full-year target. Going forward, meeting the fiscal deficit target of 3.3 percent of the GDP could be a big challenge for the government because of the shortfall in revenue collection, slowing industrial output and rising government spending.

A fiscal deficit of 3.5 percent, though higher than the 3.3 percent budgeted will go down well with the markets largely because it is already priced in. Even last year, that was the case.

And, this is an election year; how the markets react to fiscal deficit beyond the 3.5 percent mark, will be a function of what the government does with the money.

If the spending is seen to stimulate further growth in the economy then the markets may not fall. Otherwise, they are likely to pedal back.

Q. The Finance Minister in a speech highlighted that the government would address issues confronting the farm sector. What kind of sops are you factoring in your estimates?

A. The farm sector is plagued by many issues like fragmented land holdings, too many people dependent on a small plot, high costs of farming, lack of appropriate irrigation strategies, etc.

So, the government may take a step to mitigate the hardships of the farmers by giving them a small monetary assessment, something on the lines of Rythu Bandhu scheme of Telangana. This could relieve farmers of debt burden and prevent them from falling into the debt trap again.

However, the land is a state issue and would require some ingenuity to address the issue. If such a measure is indeed taken, it could raise the fiscal deficit, which could impact markets adversely.

On the other hand, if the amount is substantial enough it could improve the chances of the government’s re-election, which could make the markets run ahead of the elections, higher fiscal deficit notwithstanding.

Q. What according to you should be ideal portfolio allocation ahead of Budget?

A. We do not think investors need to make their portfolio strategy based on budget expectations. Global interest rates, liquidity and commodity prices will determine the fate of our markets more than the budget.

We would want investors to invest in private sector banks with industrial exposure. There could be writebacks from losses written off and increased profit from higher credit growth going forward.

The budget has also lost its importance, with the GST council decisions impacting the markets much more than the budget. The lowering of the duties that the council has done several times is mini-budget themselves.

Invest in high quality, diversified portfolio with an equal mix of largecaps and midcaps. Large-cap stocks will provide stability and midcap stocks will help generate the alpha.

Q. Any five stocks that are likely to benefit the most from the upcoming budget and why?

A. We need to understand the dynamics here. A budget may be good for a stock or a sector but the market may fall for a very different reason, for example, if the fiscal deficit is higher than expected.

Similarly, in another possible scenario, despite a higher fiscal deficit, the markets may rise if the steps taken by the government increase the chances of coming back strongly for a second term.

However, we think investors will do well to buy Axis Bank, ICICI Bank, and SBI are likely to do well this year.

ITC, on the other hand, can be bought for the simple reason that as the tax regime becomes stable, one could see the company command a higher PE.

Reliance Industries (RIL) is another stock that investors can buy for the long term. We are investing in sectors that are likely to do well, rather than suggesting for the narrow purpose of budget.

Q. Historically, which are the sectors that have been in limelight ahead of the Budget, and what are you recommending your clients and why?

A. Fertilizers, farm equipment, agri-inputs, housing finance companies, life insurance companies, AMC etc. Another typical strategy is to look at companies related to the Railways as these could benefit out of any increased outlay.

But, just buying for the limited purpose of the budget or before it does not serve the purpose. The stocks you buy may not give you positive returns.

Instead just buy your portfolio stocks when they fall and not necessarily before the Budget. More money has been lost than made through such strategies.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.