Long-term trend down but average Budget may trigger rally: Pros

With the Union Budget 2016 just round the corner, experts discuss its impact on the markets going forward. According to Ashwani Gujral of ashwanigujral.com, if the Budget is neutral that is there is nothing positive or negative, there could be a pullback rally just because the uncertainty is out of the way but the long-term would continue to be on the downside.Technically, market is weak but an average Budget could induce 150-200-point rally, he adds.Neelkanth Mishra, Head-Equity Strategy at Credit Suisse expects the Finance Minister to stay on the fiscal path, meet the deficit target of 3.5%, and hopes that there is no cut in government spending. According to him, the spending could be funded through disinvestments than changing the tax structure and increasing taxes. Government could look at divesting higher market cap public sector undertakings.Near-term he says market could get impacted if for example long-term capital gain tax was tweaked but fundamentally, global catalysts are more important – Union Budget is not so important for market as much as fundamentals are, says Mishra.Moreover, the government is also likely to implement the Food Security Act but they need to address the leakages too. Budget has a limited impact on the economy but in case 7th Pay Commission comes through then it could be an incentive to the housing sector and benefit the NBFCs. Recapitalisation of public sector banks will also be keenly watched.Below is the verbatim transcript of Neelkanth Mishra and Ashwani Gujral's interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.Sonia: What is the expectation as far as the setup ahead of the Budget is concerned. You have been telling through the course of the week that one should use every rally to sell into the market. Would that orientation continue in the Budget week as well?Gujral: The market is weak; there is no question about it but ahead of such events when the market is falling before them and then just because the uncertainty is over, sometimes you see a pullback rally. So even if it is a lukewarm Budget and nothing negative or positive, you could have a pullback rally because nothing negative happened but overall longer term the trend would continue on the downside. Also if there is a policy mistake or something then it will be a trigger which will lead to big decline. So overall the technical position is weak. Now the question is whether we rally a bit and then fall or we fall straight away post the Budget. So that's the only thing that needs be seen. An average Budget will probably induce 150-200 point rally and I wouldn't be surprise by that.Anuj: In that case what are the points that you are looking at for the Nifty - (a) for any kind of short covering bounce post Budget and (b) your eventual targets on the Nifty in this round of downtick that we are likely to see?Gujral: The stuff that has been bashed up will tend to have the biggest pullbacks. So public sector undertaking (PSU) banks, metals etc, all of these stocks even private banks to some extent basically Bank Nifty will have the biggest pullback and once 6,850 goes, you can easily take 400 points lower. So 6,450 thereabouts should be the eventual target or the next target from here and on the upside 7,250-7,300 will be difficult to cross even if it is a decent Budget.Sonia: Give us a couple of stocks that you would either go short or long on ahead of the Budget and more importantly tell us before the Budget speech should you square off any of your positions?Gujral: Generally before the Budget the social sectors like hospitals, fertilisers kind of stocks tend to do well maybe some sort of pullback could also happen in the housing finance which started today but overall the stocks that you would look at is probably Indraprastha Gas (IGL), it's a buy with a stop of Rs 510, target of Rs 545 on the buy side. Union Bank of India is a sell with a stop loss of Rs 112, target of Rs 100 because chances are that whatever he comes up with in terms of recap, will probably be short of market expectation.Anuj: What are the top expectations from the Budget?Mishra: First, the fiscal deficit target of 3.5 percent should be maintained and the fiscal consolidation part should be continued with. Second, there should not be any cuts to the government related capex, the government's contribution to railways, to roads and third, this should be funded through much more prudent disinvestment which is something the government missed out on this year. If you raise taxes and then spend it on development capex, it is actually a case of two-handed economics because you are taxing something and this and that instead if you just disinvest and then spend on development capex that acts as a growth catalyst.Sonia: Where do you see the government getting more money and where can they cut off or reduce expenses?Mishra: If the current rates of excise on petrol and diesel were to continue, you are going to see another, an extra Rs 73,000 crore of excises come through for the centre. That's a very big number. I also think that with prudent disinvestment, which is something that the government really slipped up this time, sale of Specified Undertaking of UTI (SUUTI) stake and these are very hard to understand why the government could not meet these targets. So, with these kind of numbers, and with goods and services tax (GST) coming in over the next year so, a bump up in the service tax rate, I think there can be a fair bit of revenues that can come in for the government. There is also likely to be some spectrum sale which can deliver extra Rs 5,000 crore-10,000 crore.However, on the expenditure side, the sharpest increase will be on Pay Commission. There is also expectation that the food subsidy bill will go up. There is likely that some scheme on health insurance. It will be interesting to see how health insurance scheme gets funded. If you just play with the numbers that I talked about, I think you can still arrive at a 3.5 percent number. Either way some of these targets are more topped down. When it is a policy decision taken right at the highest level as to whether India does want to renege on its promises made in the past few years of 3.5 percent and my sense is that they will stick to that. Anuj: History teaches us that the government has never been able to meet divestment target, last year is the prime example. Are you still hopeful?Mishra: I see this as a bureaucratic problem, the absence of any further information on why exactly this is not happening. I don't see any reason why something like SUUTI cannot be sold down. I don't see any reason why there cannot be a further sell down on some of the larger higher market cap PSUs. If you approach it on mission mode, you think that this is very important, I think it is very hard to understand that the government meets its tax targets which are actually somewhat to do with projections and something that should be ideally completely in its control irrespective of prices. If Coal India had been sold off in the first quarter itself they would have got a much better pricing.You can't really wait for good pricing. We have been waiting for SAIL, at one point they were trying to sell it at Rs 240 and Rs 200 and Rs 180. Now the stock is at Rs 40. So, you can't keep waiting, if you have a target, you need to sell-off just go and sell-off. If you manage it well and you do it very smartly I think you will get a good price as well.This government actually when it puts its mind to it very good at execution.Sonia: Do you think the introduction of the long term capital gains (LTCG) tax will be taken very badly by the markets?Mishra: Near term volatility on how sentiment gets affected is very hard to predict. We saw what happened on the LTCG on the fixed income products last year.There was a doomsday prediction for a few weeks and then finally the markets settled down. I suspect that any changes or lack of changes would be absorbed by the market in that way. Fundamentally the catalysts outside India are much more important for the markets.I also think that the state budgets which are now getting bigger and bigger. So, you would have seen that Uttar Pradesh has presented Rs 3 lakh 50 thousand crore budget. The central government will be presenting maybe Rs 17-18 lakh crore Budget. It is a big number, Jharkhand's expenditure this year in FY17 is projected to be 16 percent higher than what it was last year. So, there are big numbers coming out state budgets and I think their impact on the ground is going to be much more important. So, we need to track those well. The union Budget by itself does not matter as much for fundamentals as people think.Anuj: What about subsidies, we have the oil equation sorted but what about the rest of the subsidy math?Mishra: On the oil side not much needs to be said. On the fertiliser side I think there is a scope for subsidies to come down given that global energy prices have come down.On the food side from what I read in the papers it seems that the government is very intent on substantially increasing and implementing the food security act. This is something that the government even during the campaign phase before May 14 was actually committing to. So, this is not really a surprise, some people do seem to be surprised that the government is doing this. If you go through what the campaign speeches were I don't think this is a surprise. So, let us see how exactly it is implemented.There is likely to be more announcements on this because the biggest fear is leakages in the scheme. As to how the government goes about addressing those leakages, if these leakages are addressed then I think given the stress in the agricultural side of the economy perhaps this may even be supportive of growth.Sonia: Any particular sectors that you are watching closely in this Budget?Mishra: The Budget has very limited impact on the economy but I do think that if the government was to give incentive on the housing sector, this is not one sector, there can be NBFCs that benefit. If the pay commission is implemented properly it can affect the NBFCs that lend in the housing sector, the home improvement companies. Let us see what the announcements are on the banking side, though I think that the eventual solution is still being worked upon but if the Finance Minister makes some announcements on the recapitalisation of banks, if that quantum is being increased, those would be the two important things that I would look out for.