Average sensex returns generally negative post-budget

Sensex has dropped around 1% in the one and three month period post budget says Bank of America Merrill Lynch

The market has given negative returns on average in the period immediately after the budget. The BSE's Sensex, whose movements are held to be representative of how the market is doing, is down 1% on average one month after the budget. Its average returns are a negative 1.4% three months after the event, according to an analysis by Bank of America Merrill Lynch dating back to the budget delivered in July 1996.

The analysis was part of its India Equity Strategy report dated July 01. The report also noted that the budget has been having a lesser impact on the market in recent years.

"The market impact of budget has been reducing since (a) most reforms don't wait for the budget eg the rail fare and freight increase and (b) tax rates are relatively stable and hence the changes in the budget are small and have only marginal impact on earnings," said the report authored by research analysts Jyotivardhan Jaipuria and Anand Kumar, and India Economist Indranil Sen Gupta.

The worst one month post-budget returns were in 1998, when the Sensex was down 12.4%. The worst returns in the three months after the budget came in 2000, when the Sensex was down 27%.

This year's budget is to be presented on July 10. The trio believe that it is likely to provide a roadmap on reforms.

"While most...reforms will happen outside the budget, investors will probably get an idea about the reform priorities of the Government (read here our views).Overall, we continue to expect reforms to drive markets to our year-end target of 27,000..." said the report.

It said that mid-caps are likely to outperform large cap companies; and companies with a domestic focus would do better than those who derive revenues from abroad.