Mr Market will come crashing down if Budget disappoints it

During the week gone by, Mr Market was jittery ahead of the Union Budget and on concerns over high valuation of frontline stocks. However, strong buying emerged in the smallcap and midcap space, helping Nifty50 to surpass its previous highs by a wide margin.

IMF, in its wisdom, has trimmed FY20 economic growth forecast for India to 4.80 per cent, which is at a decadal low. But the market is pinning strong on the hopes on the Union Budget 2020, expecting that the Finance Minister will play her magic wand once again and try and bring about a sustained turnaround in the economy.

This is why the market was still defying gravity and inching higher during the week. If the Budget does not meet the high expectations, which historically it rarely has, the market can see a sharp selloff post Budget.

The odds for this look high, this time too. Secular sectors like financials have reported decent quarterly earnings for December quarter. Kotak Mahindra Bank reported a 27% increase in PAT; HDFC Bank logged 30% jump in PAT on a YoY basis, whereas, Axis Bank reported muted earnings performance with a 6-odd per cent PAT expansion. Nonetheless, the financial sector witnessed slow loan growth and remained feeble across the industry, both on retail as well as corporate sides. Other large companies, namely RIL and TCS, reported muted numbers with PAT increasing 14% and 0.27%, respectively. On the whole, the earnings performance looks in line with the slower economic growth, and there was neither any positive surprise, nor any sign of green shoots.
The market has been a buyout due to liquidity, and anything can turn the tide; even the fear of the corona virus can make it sick.

Event of the week

‘Christmas’ month historically brings with itself discount sale in order to clear the inventory in the auto sector. In spite of these discounts, retail sales of automobiles, namely four-wheelers and two-wheelers, witnessed a drop, which is an ominous sign for the sector. If, therefore, the government does not announce a ‘scrappage policy’ in the upcoming Budget, the sector might see a massive selloff in the aftermath. The department of telecom (DoT) has allowed 100% foreign direct investment in telecom major Bharti Airtel, which signals an assurance that the company will survive even with the help of absolute foreign ownership to ensure healthy competition.

Technical Outlook

The market is climbing higher, taking support at rising trend line which had been formed since October last year. However, the velocity is waning with every rise, which makes the 12,050 level on the Nifty50 crucial for the market to sustain the upward trend. Any move below 12,050 level should be seen as the beginning of a bigger correction. However, until that time traders can hold long positions and keep buying on declines with weekly lows as stop losses. Volatility will remain high and, therefore, one should be more cautious.