Notwithstanding the budget day reactions, the historic market movement of the five budget cycles in which the UPA government tried to resurrect the Indian economy from the aftermath of the 2008 financial crisis, suggest that the Street almost always shrugs off budget blues in a matter of 15 to 30 days.
Data suggests that even as the market remained under pressure a month ahead of the Union Budget , barring negative near-term reaction for FY13 budget announcement, a month after the budget the benchmark indices always traded in green with returns averaging at about 4%.
However, this time around, the market reaction could be very intense given the already high valuations at which most stocks are currently trading. Despite the disappointment from the latest earnings season across sectors and Sensex earnings contracting more than 5% y-o-y, the benchmark currently trades at one-year forward earnings multiple of 16.5 times compared to its long-term average of 15 times.
Given such high valuations at a time when corporate earnings fail to reflect the uptick in economic activity, and while India is considered the preferred emerging market for foreign investors, the upcoming Union Budget is regarded as the most important event for the stock market. Traders and investors are closely watching the Modi government’s full maiden budget which they expect could usher in the next wave of economic momentum similar to the move for economic liberalisation in the early 1990s.
According to Kotak Institutional Equities, due to the market’s heightened expectations from the Budget and five important economic bills pending before the Parliament, the Budget session is likely to set the tone for the next few months.
While the BJP government’s stance on issues like the fuel subsidy and schemes like NREGA have been well appreciated, the recent outcome of the Delhi elections in which the Aam Aadmi Party (AAP) gained a striking majority after promising cheap electricity and free water, have raised concerns that the central government may also lean towards populism at the expense of the fiscal prudence.
Morgan Stanley, in a recent strategy note, said the government could consider measures like cutting tax rates to stimulate the economy, carrying out expenditure reforms through subsidies, increasing spending on selective infrastructure projects and continuing on the path of fiscal consolidation. “The market’s near-term attention will be on potential tax cuts and an absence of populist fervour,” the brokerage said.