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How Have Stock Markets Reacted to the Budget? (Premium)


How Have Stock Markets Reacted to the Budget? (Premium)

In our Capital Mind Premium Budget coverage,we look at how stock markets have reacted to budgets. Remember, the budget is next Thursday (July 10).

The Budget Day

Till 2000, we hadn’t gotten rid of our colonial mindset. The Budget used to be announced at 5pm on the last working day of February. Why 5pm? Because the British used to have their budget at around the same time, and to accomodate, budgets were announced later in the day in India.

Yashwant Sinha changed that in 2001 by moving it up to 11 AM. Which means markets were open when the budget was announced, so we can actually go back and check how the market did.

Here’s how.

How Have Stock Markets Reacted to the Budget? (Premium)

2001 was the only budget that saw a huge up move, and most of the rest of the budget days have been down.

But if you look one week after (measured from the close prior to the budget day) the move is more “secular”. In 2008, when we saw markets tank in March to a -8% return in the week, and in 2004 after the “interim” budget, markets climbed up 6% as they came out of a temporary bottom.

It does look, though, that budgets have been less “blockbuster” in the recent past (since 2011) as moves are relatively small.

The Big Picture

Let’s look at markets from a month before the budget, to the month after, and see how they’ve moved. Are there any worthwhile trends?

How Have Stock Markets Reacted to the Budget? (Premium)

While 2001 saw markets tank, it wasn’t really the budget, it was the dot-com bust. The markets fell after the 2004 interim budget as well,and you can see that in the last 14 years:

• 5 budgets saw a downtrend after the budget (fell one week and further down a month later)

• 4 budgets saw an uptrend after (rose one week and further up a month later)

• 5 budgets saw no trend

However the quantum of these moves have reduced in the past few years.

The Second Biggest Year to Date Move

While this is a strange budget (in July rather than in February) the Year to Date move is over 22% the biggest since 2009:

How Have Stock Markets Reacted to the Budget? (Premium)

2009 was a good year – it actually ended up 75% (and was the last election). 2004 had -20% till the main budget, but it ended UP +10%, which means it recovered another 30% after the budget.

We have just two real data points to use. So we can’t use it for any longer term prediction, even if it does look very positive.

Where Will We Go Next Thursday?

The budget’s on Thursday, July 10. Markets will react to announcements and this is the first time we have had a strong government (where one party has a majority) in a very long time. However, expectations are very high and we think the budget will disappoint us.

The markets have made yet another all-time high today and it makes no sense to be short, but we think this will be a kitchen-sink budget. The concept is that you use one year to “wash away the sins” of the past government.

This could involve controlling the deficit but keeping it high enough so that the past government can be blamed for things going wrong. We have to see the Food Security Act implemented, and upfront costs will be huge. We have to see sops for manufacturing as it continues to lag. To ensure foreign investor interest is kept alive, we might see their debt limits increased.

This may also involve some harsh measures like increasing prices of fuels so that eventually subsidies can be reduced. Or, in a combination, a reduction of taxes on fuels to balance out the cut in subsidies.

We don’t see taxes cut this year – there’s too little of it left for people to plan out a year. We expect a lot of pending capex that the earlier government didn’t take on. We like the following sectors:

  • Defence, as capex spending will mean buying more equipment.
  • Shipping because it is a stated goal of Nitin Gadkari to enhance transport via rivers and the ocean.
  • Tourism. This is the first thing in the BJP Manifesto. More on this in a separate post, but we aren’t big on airlines or five star hotels just yet.
  • Railways, because they need a capex cycle very badly.

This budget could spring many surprises. We think this is the year of volatility, when markets have a big move. In this context, it may be interesting to consider futures and options positions, even as the VIX remains low at 18.

We’ll discuss more in further posts. The market remains very bullish, with foreign investors pumping in money back again (into both equity and debt) in the last week. The monsoon is still 43% deficient (below normal) and prices are beginning to spike, and there is still the unrest in Iraq to worry about – and it’s apparent that markets don’t care. Good luck with the budget, and let’s hope this will be a rewarding year ahead.



Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.




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