The bud­get’s de­clin­ing ef­fect on the stock mar­ket

The Pak Banker - - OPINION - Ash­win Ramarathinam

AN in­vestor in 1992 could make more money in a month by just buy­ing in­dex stocks ahead of the bud­get than he would have by in­vest­ing in a fixed de­posit for a year. And he could have taken this risk with great suc­cess mul­ti­ple times dur­ing that decade. But no longer. The Union bud­get is not what it used to be for equity mar­kets. Wild swings in stock prices as the fi­nance min­is­ter speaks to the na­tion about how the govern­ment is go­ing to spend its money have been on the de­cline. A Mint anal­y­sis of 31 bud­get day move­ments (in­clud­ing in­terim bud­gets) since 1991, the year when lib­er­al­i­sa­tion be­gan, shows that av­er­age bud­get day move­ment for the Sen­sex has been trend­ing down­wards, per­haps helped by the re­al­iza­tion that re­forms are not a bud­get-only phe­nom­e­non. The mar­ket moved more than 10% (the dif­fer­ence be­tween the day's high and low for the Sen­sex) when the govern­ment pre­sented the bud­get in 1993. This was down to 2.35% in 2015. The av­er­age bud­get day move has de­creased from 4.2% in the 90s to 3.78% in the sub­se­quent decade, and 2.49% af­ter 2010.

"Re­cent his­tory shows that the bud­get is likely to be not an in­flex­ion point for the mar­ket but rather an­other step in the di­rec­tion of an eco­nomic re­cov­ery and long-term re­form," says an 11 Fe­bru­ary re­port from in­vest­ment bank Mor­gan Stan­ley. Even an­tic­i­pa­tion of re­forms or big-bang an­nounce­ments seems to be de­clin­ing. There were mul­ti­ple oc­ca­sions in the 90s when in­vestors could have made more than 10% in the sin­gle month lead­ing up to the bud­get. The pre-bud­get rise was as high as 36.29% in 1992. This was down to 7.37% in the 2000s. The trend has shown a fur­ther down­ward drift since then. Gains have been lim­ited, and one-month re­turns have ac­tu­ally been neg­a­tive in the run-up to ev­ery bud­get since 2007. Post-bud­get one-month re­turns tend to be neg­a­tive if pre-bud­get ex­pec­ta­tions have been pos­i­tive, es­pe­cially in re­cent years. Eight out of 14 in­stances where mar­ket re­turns were pos­i­tive be­fore the bud­get have seen neg­a­tive re­turns af­ter­wards. There were pos­i­tive re­turns in the one month af­ter the bud­get eight times out of the 17 times that the Sen­sex was neg­a­tive lead­ing up to the bud­get. What about the cur­rent year? The Sen­sex was al­ready down 5.29% by 15 Fe­bru­ary, mak­ing this month lead­ing up to the bud­get the eighth worst (un­less the trend is re­versed in the next cou­ple of weeks). This fall is greater than MSCI World (3.73%) and MSCI Emerg­ing Mar­kets (2.09%). So could the cur­rent fall ahead of the bud­get be seen as a buy­ing op­por­tu­nity? An 11 Fe­bru­ary Bank of Amer­ica Mer­rill Lynch Equity Strat­egy re­port said that the mar­ket of­fers value even if the bud­get doesn't make much of a bang.

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