16th March 2012

The Union Government presented a budget in line with market expectations and in our view is largely neutral for equities.

What we like?

It meets the minimum requirement of fiscal consolidation. The government proposed reducing the central fiscal deficit from 5.9% in FY12 to 5.1% in FY13. The deficit reduction was backed by specific measures at raising taxes primarily an increase in the excise duty and service tax rate from 10% to 12%, and broad-basing the service tax via a negative list.

The government announced a number of measures for capital markets including tax incentives for small investors in equity savings schemes, reducing taxes on securities transactions, allowing qualified foreign investors in the domestic bond market, and easier norms for listing of corporate bond offerings in exchanges.

The budget is also positive for investments in infrastructure. More infrastructure sectors have been added as eligible for viability gap funding from the government. However, to change our view from neutral to overweight Infra sector would require a hike in diesel and petrol prices in the near term.

What has been missed out?

The budget does not resolve problems relating to subsidies. We see room for the subsidy bill to overshoot.

What we see as a potential threat?

Rising oil prices.

Economics

Slightly better than before on account of some steps towards fiscal consolidation. Higher crude prices, problem of current account deficit and high interest rates remain.

Sentiment

Justifies investments in equities - Since domestic investors are massively underweight equities and more so in case of mid/small cap category, it is a powerful positive for long term investing in equities. Rajiv Gandhi Equity Scheme will be a long term trigger.

Valuations

Not worried on valuation front unlike the case in 2007 / 08. Valuations at 10 year historical average post recent rally. Still find these attractive across large and mid-cap space.

Triggers

What can be seen as a biggest positive in near term for becoming positive on equities from a neutral stance? An increase in diesel and petrol prices by Rs. 4 / litre each.

Current stance

Neutral weight on equities.

Sectoral view

We like Pharma sector for defense, Exports & Telecom sectors due to recent underperformance. We are underweight on Capital goods due to poor near term outlook. The increase in services tax and excise will be negative to some extent on consumption sector. The outlook on infra is slightly more positive. On Auto, we are again slightly positive now since no special diesel tax has been introduced. We prefer export oriented sectors including IT/software over banking.

Triggers for increasing allocation to equities

Brent Crude prices falling below US$ 110 per barrel and increase in diesel and petrol prices. Our earlier triggers of fiscal consolidation and increase in excise duty and services tax have been met.

Likely direction of market

Range bound with volatility. Global events to be watched. From a global perspective though, LTRO 2 (Long-Term Refinancing Operations) has attracted investors' attention towards global risk assets and India among emerging markets could be a big beneficiary of this global risk trade.

With respect to fixed income investments we continue to believe that the one to three year space offers attractive risk adjusted returns and investors can benefit by investing in the short-term and mid-term space.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

All figures and other data given in this document is dated. The same may or may not be relevant at a future date. Prospective investors are therefore advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of ICICI Prudential Mutual Fund.

Disclaimer: Nothing contained in this document shall be construed to be an investment advise or an indication of the benefits or returns of investing in the products mentioned herein. In the preparation of the material contained in this document, the AMC has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. We have included statements / opinions / recommendations in this document, which contain words, or phrases such as "will", "expect", "should", "believe" and similar expressions or variations of such expressions, that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to Market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.

The AMC (including its affiliates), the Mutual Fund, the trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. Investors/ recipients of this document are requested to consult their financial advisor and the recipient alone shall be fully responsible/are liable for any decision taken on this material.