Business Standard

Market seldom rallies before Budget

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Under rule, Sensex has given flat or negative returns 7 out of 9 times in pre-month

Stock markets seem to prefer stable governments. But they have seldom rallied or fallen sharply before the government presents its most important document of the year – the Union Budget.

In the last eight years, when the Congress-led United Progressive Alliance (UPA) was in power, the Bombay Stock Exchange Sensitive Index or the Sensex fell or remained stagnant seven times.

In sharp contrast, when the Congress-led United Progressive Alliance (UPA) came to power for the second time in May 2009, the stock market gave it a warm welcome.

Both the Sensex and Nifty rallied sharply and hit upper circuits in the first few minutes of trading. After the Nifty rose a whopping 20.75 per cent, trading had to be suspended for the day.

Business Standard analysed the performance of the Sensex for the one-month period before the Budget day since 2004, when the UPA came to power, to get the sense of market movements. On three occasions — 2004, 2005 and 2008 — the Sensex gained less than one per cent. In case of four other times — 2007, 2009, 2010 and 2011 — the 30-stock index delivered negative returns. There were two Budget presentations in 2009 — an interim Budget in February 2009 prior to the general elections, and the regular Budget in July 2009, post-elections.

Things are not looking any different this time. At Friday’s close of 17,503.24, the Sensex has fallen 699 points, or 3.84 per cent, since its close on February 15. Finance Minister will present the Budget for financial year 2012-13 on March 16.

“The markets are usually flat in the month ahead of the Budget and, in two out of three years, fall in the month following it,” Ridham Desai, strategist and head of India equity research, Morgan Stanley, said in a strategy note to clients. He studied Sensex movements one month before and after the for the last 15 years.

According to Desai, history does not favour the market in the following three-four weeks after the Union Budget. Not just that, in the past 15 years, even in years when the Sensex gave positive returns in a one-month period post-Budget (1997, 1999, 2004, 2006, 2009, 2010 and 2011), there does not seem to be a great correlation between market performance and a market-friendly Budget, Desai said.

The Sensex has fallen between three per cent and 13 per cent on four occasions — 2005, 2007, 2008 and 2009 — during the one-month period post-Budget under the UPA regime. On the other hand, the 30-stock index has gained between one per cent and nine per cent five times — 2004, 2006, 2009, 2010 and 2011.

“Before the Budget, traders take positions in out of money options, rather than buying in cash market and futures. That is why we see a flattish market,” said Alex Mathews, head of technical and derivatives research at Geojit BNP Paribas Financial Services. “After the Budget, market usually rallies if traders and investors like the announcements.”

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Market seldom rallies before Budget

Stock markets seem to prefer stable governments. But they have seldom rallied or fallen sharply before the government presents its most important document of the year – the Union Budget.

Under rule, Sensex has given flat or negative returns 7 out of 9 times in pre-month

Stock markets seem to prefer stable governments. But they have seldom rallied or fallen sharply before the government presents its most important document of the year – the Union Budget.

In the last eight years, when the Congress-led United Progressive Alliance (UPA) was in power, the Bombay Stock Exchange Sensitive Index or the Sensex fell or remained stagnant seven times.

In sharp contrast, when the Congress-led United Progressive Alliance (UPA) came to power for the second time in May 2009, the stock market gave it a warm welcome.

Both the Sensex and Nifty rallied sharply and hit upper circuits in the first few minutes of trading. After the Nifty rose a whopping 20.75 per cent, trading had to be suspended for the day.

Business Standard analysed the performance of the Sensex for the one-month period before the Budget day since 2004, when the UPA came to power, to get the sense of market movements. On three occasions — 2004, 2005 and 2008 — the Sensex gained less than one per cent. In case of four other times — 2007, 2009, 2010 and 2011 — the 30-stock index delivered negative returns. There were two Budget presentations in 2009 — an interim Budget in February 2009 prior to the general elections, and the regular Budget in July 2009, post-elections.

Things are not looking any different this time. At Friday’s close of 17,503.24, the Sensex has fallen 699 points, or 3.84 per cent, since its close on February 15. Finance Minister will present the Budget for financial year 2012-13 on March 16.

“The markets are usually flat in the month ahead of the Budget and, in two out of three years, fall in the month following it,” Ridham Desai, strategist and head of India equity research, Morgan Stanley, said in a strategy note to clients. He studied Sensex movements one month before and after the for the last 15 years.

According to Desai, history does not favour the market in the following three-four weeks after the Union Budget. Not just that, in the past 15 years, even in years when the Sensex gave positive returns in a one-month period post-Budget (1997, 1999, 2004, 2006, 2009, 2010 and 2011), there does not seem to be a great correlation between market performance and a market-friendly Budget, Desai said.

The Sensex has fallen between three per cent and 13 per cent on four occasions — 2005, 2007, 2008 and 2009 — during the one-month period post-Budget under the UPA regime. On the other hand, the 30-stock index has gained between one per cent and nine per cent five times — 2004, 2006, 2009, 2010 and 2011.

“Before the Budget, traders take positions in out of money options, rather than buying in cash market and futures. That is why we see a flattish market,” said Alex Mathews, head of technical and derivatives research at Geojit BNP Paribas Financial Services. “After the Budget, market usually rallies if traders and investors like the announcements.”

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