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How to position yourself ahead of the Budget? 12:48 February 23, 2011
Alok Agarwala
Research Head

How to position yourself ahead of the Budget?


It’s February and its Budget time once again. Budget holds a lot of significance in our lives. Though the degree of significance might vary from person to person, but nonetheless, it is an important event for all, right from the polity, to the policy makers, to businesses, financial markets, investors, the common man on the street, the homemaker, average salary earner, all! All of us have our own set of things to look at in the Budget.


Whilst on one hand, the budget gives a detailed program on the expenditures and incomes of the government planned for the following fiscal year, it is also an important forum where the Finance Minister puts forth the tax rates and tax related provisions for the upcoming fiscal year, details the plans and policies for various sectors and industries, introduces new schemes for public welfare, and so on and so forth. Overall, it is a comprehensive exercise on what to expect on the economic and fiscal front in the next fiscal year.


Budget and the Stock Markets - The Myth about Pre-Budget Rallies


From the view point of the investor, it is important for him to see the impact of the budget on the financial markets as well as on tax rates that will ultimately affect his disposable incomes. There is a general perception that the equity markets see a rally in the build-up to the budget called the pre-budget rally in stock market parlance. Nothing could be farther from the truth as an analysis of pre-budget behavior of stock markets since 1996 shows.


Union Budget has been declared 17 times since July 1996 (including interim budgets) and stock markets (represented by the BSE Sensex) have given positive returns during the preceding 30 days in only 6 out of the 17 such occasions. On 8 such occasions, the markets have been negative by more than 1%, whilst on the remaining 3 occasions they have been almost flat giving returns between (+/-) 1%.


The behavior of markets even after the budget, say a week after the budget and a month after the budget also does not show any clear trend, with positive returns being seen on less than 50% of the times. Hence, the general perception of a pre-budget or post budget rally is largely unfounded. Of course there are singular instances of stocks from budget sensitive sectors moving up or down for instance stocks associated with railways, education, automobiles, etc but it is very risky to take directional calls even in such cases, in absence of clear trends.


What should an investor do then?


Investments in stock markets should thus be guided by fundamentals and valuation levels than by budget expectations. However, if anticipations from the budget are likely to support fundamentals and valuations, then one can invest in sectors from time to time based on budget expectations.


Infrastructure Sector can be a major beneficiary from the upcoming Budget


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