Sensex rallied both before & after Budget only twice in 3 decades. Will history repeat?

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With return-hungry investors pricing in most of the expected boost from the Union Budget well ahead of July 23, the chances of a post-Budget rally looks miniscule if historical trends are taken into account.

An analysis of market behavior around Budget days shows that in the last 30 years, Sensex has been up 30 days before and after the Budget only on two occasions - 2006 and 2017.

The market has fallen on two of three occasions in 30 days post the budget and the probability of such a fall rises to 80% if the market has risen in the 30 days preceding the Budget, according to a report by Morgan Stanley.

"This year, India is tracking higher on both an absolute and relative basis and if it were to hold this performance into the budget day, then there is a strong likelihood that it corrects post budget," said Ridham Desai of Morgan Stanley.

According to another analysis of 24 budget days since the year 2000, investors seem to reduce exposure one week before the D-Day and re-enter one week after the Budget.Since 2000, the best return on Budget day was observed at 4.1% on 1st February 2021, and the worst return was recorded at -5.4% on 6th July 2009, a study by Capitalmind shows.Morgan Stanley believes that the Budget to be presented on July 23 by Finance Minister Nirmala Sitharaman is going to be about reducing the deficit, increasing manufacturing share in GDP via fiscal incentives and physical infrastructure, boosting agriculture, increasing female participation in the work force and further build in social infrastructure for poverty alleviation.A section of the Street is baking in the possibility of Sitharaman boosting rural consumption through a combination of both personal tax cuts and redistribution.

"We think the market is likely to be disappointed on this front. Tax cuts really do not help, given the fact that if they happen, they are likely to be quite small and redistribution is very unlikely since it is against the BJP's policy. We believe spending will focus on infrastructure (physical and social) and, therefore, will not be a direct boost to consumption. The government has already committed itself to a larger build of homes for poor people," Desai said.

Another reason for disappointment for investors in the Budget could be too much contraction in the fiscal deficit as it may be negative for earnings outlook.

Goldman analysts expect the government to stick to the announced fiscal deficit target of 5.1% of GDP and announce further consolidation to a deficit of below 4.5% of GDP by FY26.

Vinay Gupta, Director, Trustline, suggests investors can hedge their investments by using index Put Options, doing sector-specific hedging, diversifying across sectors and asset classes and adopting a staggered investment approach.

"It requires a judicious blend of strategic hedging and informed investment decisions to be able to straddle the market in the environment of Budget Day. By way of getting an idea about the trends in sector-specific ETFs, diversified portfolios, and index put options, an investor will be suitably armed toward insulation from probable risks during such times," Gupta said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

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