How stock markets have behaved before and after Budgets since 2000
As Dalal Street prepares for the upcoming Budget presentation by Finance Minister Nirmala Sitharaman later this month, a study of market behavior since 2000 reveals that investors tend to reduce their exposure one week before and re-enter one week after Budget day. However, investing on the day before the Budget results in mixed outcomes, with a 54% chance of negative returns one month later, akin to a coin toss.
"Market behaviour one week before and one week after Budgets are interesting mirror-images of each other as investors seem to reduce exposure due to uncertainty up to day, negative 63% of the time, followed by re-entering once the uncertainty recedes after the event, positive 62% of the time," Capitalmind said in a report.
However, if one invests on the day before the Budget, returns one month later indicate a coin toss, with a 54% probability of being negative.
Once you increase the time horizon the odds of positive returns on the one-year time frames are consistent with the overall equity market behaviour, i.e. positive in 2-3 of any 4 years, it said.
"What our study implies is that while there tends to be significant volatility leading up to and immediately after the budget based on expectations, the longer term is driven by the underlying fundamentals of corporate earnings growth. Long-term investors should avoid making significant equity allocation decisions based on expectations or announcements made in the Budget," said Capitalmind's Anoop Vijaykumar.
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.
The study also finds that Union Budgets are poor predictions of annual returns.
"In the 2003 Union Budget, the NDA government prioritised reducing the deficit by introducing new taxes, including state-level VAT and . The CNX500, the broad market index of the top 500 companies in India, ended the day up 0.5%. A month later, the index was down 6%. A year later, the market had doubled," Vijaykumar said.
Once you increase the time horizon the odds of positive returns on the one-year time frames are consistent with the overall equity market behaviour, i.e. positive in 2-3 of any 4 years, it said.
"What our study implies is that while there tends to be significant volatility leading up to and immediately after the budget based on expectations, the longer term is driven by the underlying fundamentals of corporate earnings growth. Long-term investors should avoid making significant equity allocation decisions based on expectations or announcements made in the Budget," said Capitalmind's Anoop Vijaykumar.
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.
The study also finds that Union Budgets are poor predictions of annual returns.
"In the 2003 Union Budget, the NDA government prioritised reducing the deficit by introducing new taxes, including state-level VAT and . The CNX500, the broad market index of the top 500 companies in India, ended the day up 0.5%. A month later, the index was down 6%. A year later, the market had doubled," Vijaykumar said.
Source: Stocks-Markets-Economic Times
