Historical data shows a high correlation between market direction on Budget Days and stock returns for the following month.
In post-Budget months, the stock market has usually followed the Budget-Day momentum in 11 out of last 17 Budgets. In the six instances that saw a divergence, the absolute difference in the returns wasn’t very high, Bernstein said in a note.
The one-month post-Budget return has been negative on last four occasions, with an average decline of 4.7 per cent, thanks to an increase in taxes on gains from securities as well as sluggish macros. Finance Minister Nirmala Sitharaman’s last two Budgets were followed by negative returns of 4.5 per cent and 8 per cent for the month that followed. This excludes the gains/losses seen on the Budget Day.
“The Budget Day return is a good indication of what happens in the post-Budget month,” the brokerage said, suggesting that the one-month return has in general remained positive for the years in which the GDP growth was strong.
On Tuesday, IMF forecast India’s economy to de-grow 8 per cent in FY21 and then see double-digital growth in FY22 and FY23.
Axis Securities said while past Budgets have disappointed the equity market more often, the Finance Minister has promised a landmark Budget for FY22.
“Whether landmark or not, the FY22 Budget will be historic in the wake of an unprecedented pandemic that caused great economic loss. India has managed the pandemic much better than many developed economies and the cost borne by the government has been manageable. The FM has been unequivocal about spending on capital expenditure to revive growth and create jobs. At this juncture, the Budget is expected to be constructive. However, the fiscal room available is not very significant, even after considering the improving economy and better-than-expected tax collections,” the brokerage said.
Budget Day show
Domestic equity indices have declined on Budget Days in 10 out of past 17 occasions, with an average drop of 1.8 per cent. Equity markets reacted negatively to both the budgets that Finance Minister Nirmala Sitharaman unveiled previously.
“On the Budget Day in FY20, the equity index declined 2.5 per cent while in FY19 (full year budget), the market fell 1.1 per cent – both fairly large moves,” Bernstein said.
Pockets that have generally fared well on the Budget Day are consumption-based sectors such as FMCG & auto – mainly due to the Budget focus on personal tax cuts in the past, while PSU stocks have underperformed.
“It is hard to scrutinise each driver for sectoral movements, as that’s would be a PhD exercise in itself – peeping into the past and measuring expectations at that time,” Bernstein said.
Market expectations high
Antique Stock Broking said the expectation is running high from the Union Budget and any disappointment in the form of higher fiscal consolidation (spending cut), a higher long-term capital gain tax or a hike in tax rates on individuals would be construed negatively, especially at the time of current elevated stocks valuation.
“Nonetheless, we expect a growth-oriented Budget to help a cyclical recovery – and recommend an overweight stance on investment-linked sectors,” it said.
Sharekhan said the government may maintain its focus on developing roads, water supply and affordable housing.
“Further extension/granularity of the production-linked incentive schemes to spur manufacturing are likely in the Budget. There could be some initiatives to support the urban poor, especially from the disruption in the MSME sector. Infrastructure, real estate, construction and railways are among the sectors that may be in focus in this Budget,” it said.