the Indian market, the union budget is a major event where expectations of
fortunes in the new financial year are either built or dashed. Amid all the
hype and hoopla, the budget triggers either bulls to go on a rampage or bears
to hammer down stocks. Investors closely await signals on economic policy
from the government to decide whether they should call on the market.
very high expectations are built-up leading to a sharp run up in stock prices
before the budget. In other cases, markets remain subdued fearing a harsh
budget. Nevertheless it is a time when investors take big bets.
instance, there are a lot of expectations from the forthcoming budget as the
markets expec a sequel to the two earlier "dream budgets" presented
by the finance minister P Chidambaram.
study by Dimensional Securities (Demystifying markets: Pre- and post-budget),
a leading broking firm based in Mumbai on how stock markets behaved during
the periods leading up to the budget in the last 15 years since the economic
reforms were initiated, provides interesting insights into market trends.
seven of the 15 budgets, the study notes, the markets have seen a rally before
the budget if one takes the 31 trading days as the beginning of the budget
rally. Even if 16 trading days of the budget rally just before the budget
day are taken into consideration, the statistics remain more or less the same
eight occasions out of 15 have yielded a positive return, the report
says. However, whenever there is a massive pre-budget rally there is invariably
a fall after the budget.
show that except for two of the Manmohan Singh budgets, all the other five
occasions when the markets have gone up prior to the budget, have given negative
returns post-budget. "It seems that there is an inverse relationship
between the pre-budget and post-budget behaviour," says an analyst with
the Dimensional Securities.
the returns are positive in the pre-budget period, the returns are invariably
negative in the post-budget period. This clearly supports the hypothesis that
there is an irrational exuberance
in expectations from the budget which does not materialise. The expectations
are only high from finance ministers with a good track record in delivering
the goodies. However, these expectations rarely materialise and disappointment
sets in with most of the gains given up in the post-budget period.
an investor who buys 31 trading days before the budget and sells after the
budget, still benefits, says the report.
returns before the budget reflect the fear that the budget could do a lot
of harm. However, these fears are exaggerated and the post-budget returns
are positive in such cases. This also supports the hypothesis that when fear
weighs on the markets, it always results in panic selling. This should not
be seen as a crisis and one should use it as a buying opportunity, prescribes
the report. The broad theme that emerges is that one is better off doing the
opposite of what the market is doing. If there is a pre-budget rally, then
one should sell and buy post-budget. In case, there is panic selling before
the budget, one should buy into the panic selling and sell after the budget,
the report said.
movement on budget day does not give any clear indication about the market
trend.It seems that the real Christmas time for the stock market is the budget
day with the finance minister playing Santa with his bag of gifts. However,
it is a completely different matter that on more occasions the investors are
not happy with the gifts handed out.
clearly indicates that once budget expectations are built, the room for disappointment
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