Budget: does it matter?
Stock movements based on budget fears and hopes are mostly short-lived
Every year, fears and expectations grip the market ahead of the Union Budget. The irony is that most of the time, expectations are not met and fears are proven wrong. Still, the cycle of fears and hopes revisits the market each year.
This year is no different. Hopes are now running high about a cut in corporate tax rates and higher thresholds for personal tax slabs. Fears are also expressed about a tweak in capital gains tax that could hurt market sentiments.
The fact, however, is that a budget alone cannot guide the course of a stock market. Budgets do tend to influence stock prices for some sessions, but they revert to fundamentals soon enough. If the economy is doing well and global liquidity conditions are good, even a hard-hitting budget would be taken in the market’s stride. On the contrary, if global liquidity is bad and the economy is sliding, not even a big-bang budget can lift the market.
Many investors rest their buy/sell decisions on budget-centred market sentiments, only to regret when the dust settles. Look at the last couple of sessions. Every rise in the market was being touted as a budget rally, though probably the rally had got more to do with the global trend than the imminence of the budget.
A look back to the previous years would show that the frenzy built around a sector during the budget days are short-lived. Let’s examine some most visited budget time fears.
A common fear that hits the market around a budget is that the excise duty on cigarettes would be hiked. This fear is not totally unfounded as most budgets had hiked the duty on cigarettes. Because of this, cigarette stocks would start underperforming the market before the budget. On the budget day, too, these stocks are beaten down. After some days, the same stocks start moving up to return to their earlier highs.
Those who had sold the cigarette stocks on excise duty fears were proven wrong time and again. Reason: despite duty hikes, the bottom line of cigarette firms have been growing because of a gradual rise in volumes. No budget was capable of stopping the volume growth of cigarettes. So, why sell a cigarette stock over an excise duty hike? Savvy investors would use the decline in prices as an opportunity to buy these stocks. The compound annual growth rate of the ITC stock from year 2000 is 17.74 per cent, one of the highest for large-cap firms.
Let’s move to the expectation side. For many years, right before the railway budget—which is integrated into the main budget this time—stocks related to the railway tend to gain weight on hopes of higher budget outlays, and in turn, more business to the concerned companies. In the past many years, it is noticed that these railway stocks start gaining weight six to eight weeks ahead of the budget. But soon after the budget, they tend to start slipping, most often, shedding all the gains made in the rally. In this case, too, there is a reason for the decline in stock prices.
In the past many years, while allocation for the railways were made, the actual delivery of orders and their subsequent execution got inordinately delayed. The gap between the rail budget presentation and the allocations reflecting on these companies’ bottom lines are too wide. The returns on most railway stocks had been below the Nifty returns, except in phases where low liquidity and a surge in demand around the budget time make them some sort of trading stocks.
Take cement sector stocks, which also move up around the budget time. Hopes are built every time that cement demand would go up when the budget announces more incentives on housing loans and sets aside more funds for infrastructure. In the run-up to the budget, cement stocks are on the buy list of every investor. But mostly, the cement rally fizzles out after the budget. Of course, some cement stocks have given decent enough long-term returns, but that is more on the economy’s strength and the long-term outlook on the sector than on a budget.

Now comes companies focused on the rural sector. Stocks related to irrigation and fertilisers tend to gain weight ahead of the budget but the rally ends in far less time that it took for these stocks to climb the highs. The fact is, issues related to rural India cannot be solved in a single budget, though theoretically such stocks are poised to gain from any rural uplift. The trouble is that market expects things to happen in a matter of months and builds that into stock prices in advance. Long-term return charts of fertiliser stocks will make it amply clear that one event doesn’t change the fortunes of a sector.
It is not the budget alone, examples abound of events that are given more importance than is due. Take RBI policy meetings. Every time RBI announces a cut in policy rates, real estate stocks move up sharply. The conventional wisdom is that when interest rates fall, the demand for real estate moves up. But, has anyone bothered to look up what were the interest rates when real estate stocks did well domestically and globally?
The fact is, in a liberalised and globally linked economy, a budget is not of much consequence to the equity market. The hype around it is a habit which the media and Dalal Street find hard to quit.

rajivnagpal@mydigitalfc.com
(Rajiv Nagpal is consulting editor, Financial Chronicle)
Columnist: 
Rajiv Nagpal
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