How Budgets Affect Stock Markets
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How Budgets affect Stock Markets

 
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Lead Financial Analyst
The budget has traditionally been an important part of the financial year, with the government announcing exactly what it wants to do for the next year, and how it has succeeded grandly at what it said it wanted to do last year.
All throughout February, the budget concerns managed to shake up the Indian stock market, and it was more-or-less much volatile. However, a bit of consolidation was seen by the time the end of February rolled in. While the Rail Budget did not have much of an impact, the Union Budget was responsible for many upheavals.
A Budget is the government's statement of policy for the next financial year. Yes, budget announcements do affect the stock prices of those companies who will be impacted favorably or otherwise by the proposed changes in the policies. You will see lot of volatility in stock prices in the run up to the budget. I would advise investors to be patient. Understand the budget’s implication and then make your investments.
Well, at least that is what it seemed like, but now people are worried about the impacts of the latest Budget on inflation and an economy coming out of the recession. While it is true that the recession never hit India that hard to begin with, some serious impacts on jobs and other economic data cannot be denied.
It's going to be one of those years where we will at times fall a lot and we are going to go through that particular period for the next few months and then if one or two things go right, it should fairly easily pick up from there and ride about 50-60% from the bottomed. Add the budgetary impacts to that, and things do not seem to be very promising.
Part of the budget is an economic survey that gives you lots of figures on government spending and income, and the remaining part is the budget speech which tells you what they intend to do in the coming year.
Before 2000, budgets were presented at 5PM - a hangover from the British era when the Indian budget was presented to coincide with the markets in England. Yashwant Sinha changed this and our markets have been blessed with massive budget moves ever since.
Since 2000, the average budget day move is -1.22% in the last 10 years,with the wildest swing being 5% either side. Only on two occasions have there been moves of less than 1%.
The roll from the budget day to one week after is an indication that what people have finally digested information and there are clarifications issued - are interesting. While the average and median moves are small, that is because the swings are wild in either direction - in effect moves are more than 1% every single time, and bar 2004, more than 2%.
In 2002, when the swings were really wild, Yashwant Sinha had rolled back five proposals. The budget day saw a 4% fall, and the subsequent week, a 10% rise in the index.
Stock markets tend to react violently around the budget. Listed companies, either directly or indirectly gets benefit or get hurt by provisions of the budget. Following is a bar graph showing how stock markets on budget day itself moves violently - the change from the previous day to the next:
Another way to look at markets are to see where markets go from one month before the budget to after.
At times near a budget, it seems like there isn't a trade, that markets don't trend or revert, around half of the graphs show a trend, the rest don't. But as an options traders, one can take on a straddle, strangle or butterfly (buying/selling both put and call options). But you will note that these options get really expensive near the budget, because people like me have done the analysis of the past and pushed up options prices through buying. One can make an analysis out of the India VIX (Volatility Index), which has a "normal range” of 16%-20%, the VIX tends to shoot up before important announcements such as the budget, or election results. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term.
As India is increasing its spending on Infrastructure, Infra companies are going to get benefited from it.Government spending impacts infrastructure, so stocks of companies belonging to sectors such as Reality, Transportation, Communication, Warehousing, Power Generation etc. & will react as the government tries to steady FDI in a year that it seems to have slows down. Better financial visibility will be a huge positive.
Stock markets react differently to budgets even on an individual sector basis. For instance, the budget has never been kind to tobacco industry, so there is bound to be some under-performance in ITC. The Tech sector benefits from anything that involves lower direct taxes, subsidies to semi-govt companies etc. and we saw a massive rise in these stocks through the early part of the last few years, just after the budget, as taxes were slashed and flattened.
3G auctions gave a big fillip to revenues this year, and so did public sector IPOs. But the next year may not yield that much in terms of benefit - most of the IPOs sold are today quoting below their IPO prices, with the extreme example of NHPC being about 30% lesser. With a few FPOs being lined up to raise funds such as ONGC, PFC etc, the budget may prove to be a big plus for the Infra stocks.
Overall, this isn't meant to be a great budget in terms of announcements: it's mid-term, there aren't too many elections, the main contenders of income and indirect taxes are being handled separately, and the budget is increasingly unimportant to even policy nowadays. Yet, there will be something or the other that will impact the stock you know, and with the recent drop in markets, it may be useful to position yourself in sectors that the government is likely to favour. For a long term value investor, the budget may throw up juicy opportunities to buy excellent stocks, especially if there is a negative bias. For the traders, the market volatility will go up even further, and if you can handle the butterflies in the stomach, there's never been a better time to be in the markets.
But then there are other experts who believe that the Sensex might just manage to pull through, although they have doubts about the impending price rises that could result from the hike in prices of petrol and diesel.
Irrespective of the proposals, the operate rs try to crash the market. The real impact can be seen after going through the budget proposals thoroughly and after the reaction of the business houses and chambers of commerce. But the proposals of budget would show no impact on the stocks of information technology. To some extent, FMCG sector may get affected.
Let's wait and watch and keep our fingers crossed, all the while praying for a better market than last year at least.
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