BUDGET & MARKETS

The Union Budget is to be presented on Thursday, 10th July, 2014.  In my student days Nani Palkhiwala used to give a budget speech which was superb. In those days, there was no internet and communication systems were nowhere near what they are today, yet his speech was a massive draw. I wish someone could do something similar today. There is one constant between listening to the budget then and listening to it now and that is the fact that I made little of it then and I can make even less of it now. In my opinion it takes a good 10 days to digest the provisions in any budget. How on earth does the market move in a matter of seconds and minutes is an unsolved mystery – but move it does and people are attracted by the enigmatic behaviour.  There is the usual discussion about how this will be a crucial budget. Aren’t all budgets crucial?  The only change this time  is that this will be the first non congress budget in more than a decade. Also, most important from the perspective of market players, is that the budget will set the tone for policy stance relating to the fiscal issues and economic reforms.

WILL THE MARKET CRASH/CORRECT POST BUDGET?

How does the market behave in the aftermath of  the budget?  I dug into the data and what I found was that the budget has a very temporary effect on market direction. I would say that in the last 2 years the RBI policy statement has been a more powerful vector and has been more instrumental in shaping the direction of the market in the short-term. The investing population is very enamoured with the yearly budget exercise. When you look at in hindsight this obsession with the budget is ludicrous. Why? Investors who have been waiting to enter the market since Dec 2013 are now waiting for the budget, after that I guess they will be waiting for the state elections. The table below gives the Nifty closing prices for the last five years on the pre and post budget dates. I have also added a column showing the year-end Nifty closing and the percentage year-end returns from the date of the budget presentation.

KEY PRE BUDGET TAKEAWAYS

The market has been trending upwards for the last 6 months. The question is whether the budget will deliver a body blow to this bull market? We happen to be at the half way mark for the calendar year. Keeping this in mind I sliced and diced the data for the last 5 years to see what the market trend was at the half way mark and whether it continued for the rest of the year. What does history tell of half-yearly market trends? What I am trying to establish is the correlation between the first 6 months of the year with the last 6 months.  The table below shows percentage returns at the half-year mark and for the full year for the last 5 years for the Nifty and Sectoral Indices.

 (Click on the Index to get the top ten constituents)

The above data shows the following:

• In the case of the CNX Nifty and the sectoral indices, whenever they were trending upwards at the half-year mark then the trend strengthened in the next 6 months. This is true of 90 % of the instances in the sample selected.

• The indices highlighted in red are the exceptions i.e. the trend in the last 6 months is divergent from that in the first 6 months. In all other cases, the trend continued to strengthen. It is apparent that the exceptions are few and are mainly in the sectoral indices. In the case of the CNX  Nifty, the only exception is the year 2013. There is an idiom which says that exceptions prove the rule!!

• In the year 2011, all the indices (except CNX FMCG) gave negative returns. This was apparent at the half-year mark itself. In fact, the trend accentuated sharply in the last 6 months. The market effectively was clearly showing a downtrend at the half way mark itself. Incidentally, the current year shows exactly the opposite.

• In each year there are a number of sectoral indices which have outperformed the CNX Nifty. The sectors outperforming the Nifty are highlighted in green above.

• It is apparent that the CNX AUTO sectoral index is the only index to have outperformed the Nifty in all the 5 years prior to the current one and this trend continues in the current year.

• The CNX FMCG index has given positive returns in all the years. In fact, in all the years except for 2011, it has given double-digit returns. In the current year it lags all other indices. This is surprising considering the demographics. With a looming drought situation should  this be considered a buying opportunity?

• The CNX IT index is also languishing in single digits. This is a bit confusing since though the index is trailing the CNX Nifty there are scores of mid cap stories in the IT space which have outperformed. So in this sector stock selection is critical. As of today, there is no sectoral ETF available for tracking this index.

• In the calendar year 2011, the CNX FMCG shows a marginal divergent trend, however, it still managed to outperform the CNX Nifty.

• There are four sectoral indices viz CNX FMCG, CNX IT, CNX Media and CNX Pharma which are trailing the Nifty in the current year. This is likely to continue. However, one can bet on them playing catch up with the CNX Nifty especially in cases where the under performance is significant. In other words, the magnitude by which they trail the CNX Nifty is likely to contract.

WHAT IS THE MOST  LIKELY POST BUDGET SCENARIO?

The sceptics are as usual convinced that the market will crash post budget. In the investing world, it is said that ‘a trend is your friend’. How long will this upward trending market continue, I have no clue. What I do know however, is that there is no reason to argue with the trend or bet against it. The reason why I am placing so much emphasis on half-yearly trends is because historically it has been proved that a trend is a trend and will continue to rule.  (The question that investors are asking is, will it bend? Will it alter its course through some unforeseen force and come to a premature end?). One can safely assume that barring any unexpected surprises or black swan events, the sectors which are leading the market higher in the first six months will continue to do so in the next six months.

CONCLUSION

In my opinion, the  biggest risk for the market  does not come from the provisions contained in the budget but in the play off between market expectations and actual events. This is critical for the direction of the market in the immediate term. Buy on rumour and sell on news or any such similar sounding philosophy has always worked in the market. A word of caution, the American market was expected to sell off on good news which came in the form of a jobs report on Thursday. The expectations and analysis was that the spectre of low unemployment meant higher rates and this would spook the market. The market however rose and closed above the psychological barrier of 17000.  If that is to be a takeaway of expectations v/s reality then what can one expect in the immediate term on Thursday and Friday of the coming week? If you are rooting for betting on a collapse then ‘expect the unexpected’ since markets generally go their own way without any regard to you, your emotions or your opinions about what ‘should’  happen.