Markets see best pre-budget rally in 12 years

Most analysts believe that the budget would be less relevant after a few weeks as focus would again shift to global events, macroeconomics and earnings

With a gain of 6.7% thus far in January 2018, the S&P BSE Sensex has seen the best run in one month prior to the Union Budget presentation in over a decade. The last best performance was way back in February 2006, when the index had gained around 5%, data show.

The recent rally, analysts say, comes on the back of a liquidity super-cycle and buoyant global equity markets and not just budget expectations that are getting frontloaded ahead of the event.

"I don't think the up move is happening in anticipation of budget. The importance of this event from the point of view of markets and economy has come down over the years, as a lot of key steps / reforms are being done outside the budget. This is a genuine bull-run which is backed by liquidity and the positive sentiment across global equity markets," says Jigar Shah, chief executive officer, Maybank Kim Eng Securities.

Thus far in financial year (FY18), foreign institutional investors (FIIs) and mutual funds have invested Rs 198.91 billion and Rs 1,119.49 billion in the Indian equity markets. Of this, around 152.46 billion has come in January 2018 alone.

The liquidity has pushed the indices - the S&P BSE Sensex and Nifty50 - higher by around 7% each during this period. Globally, the Indian benchmarks are among the top performing markets with only Karachi, Hang Seng and Shanghai Composite performing better in the Asian region.

THE ROAD AHEAD

So, will the markets continue to gain ground budget presentation on February 1? In the last 10 years (since February 2008), the markets have lost ground on five occasions in the month after the budget was presented, data show.

Analysts say one of the key monitorables besides the fiscal deficit target for FY19 ahead of the general elections scheduled for May 2019 will be the treatment of long-term capital gains tax (LTCG) on equities that could trigger a knee-jerk reaction. However, most agree that the budget would be less relevant after a few weeks as focus would again shift to global events, macroeconomics and earnings. These factors, they believe, will play a key role in how the FIIs and MFs allocate money across geographies and asset classes over the medium-to-long term.

"A move to tinker with the tax structure as regards equities will be taken negatively by the markets The markets, post the event, will also look at how the interest rates pan out globally and a host of other factors before they chart their course. There are indications that the rate cut cycle in India may be over. In case of a rate hike, there can be reallocation of flows," Shah of Maybank Kim Eng Securities adds.

Currently, long term capital gains (LTCG) on sale of listed securities are exempt from taxes. The proposal to bring back the tax had been mooted by the Bombay Stock Exchange (BSE) after it was abolished in 2005.

"We see little possibility that Budget 2018 delivers reasons for material upside to an already inflated equity market in India. Fiscal expansion (higher deficits) could have created some excitement, but we expect the government to stay at 3.2% of GDP (gross domestic product) for FY19. We stay cautious on Indian equities. Our December 2018 S&P BSE Sensex target is 32,000," says Sanjay Mookim, India Equity Strategist, Bank of America-Merrill Lynch.

Some of the key variables, according to Surendra Goyal, Surendra Goyal, managing director, head of India research, at Citi that will impact market sentiment through 2018 include GST collections, oil prices; impact on policy in pre-election year; corporate earnings and domestic flows. His December 2018 S&P BSE Sensex target is 36,900 levels, which is around 1.4% higher from the current levels.

 

	Sensex return in %*
Year	Before	After
Feb 2005	4.59	-3.03
Feb 2006	5.06	6.90
Feb 2007	-8.96	-0.42
Feb 2008	-3.16	-6.87
Feb 2009	-0.19	-3.89
July 2009	-7.02	10.47
Feb 2010	-2.09	7.40
Feb 2011	-3.11	6.28
Mar 2012	-3.79	-1.80
Feb 2013	-6.18	-0.14
Feb 2014	-2.85	6.69
July 2014	-0.82	-0.17
Feb 2015	-0.67	-4.72
Feb 2016	-7.5	8.3
Feb-17	3.87	2.96
Feb 18 **	6.73	--
*% returns one month before and after Union Budget
Data compiled by BS Research
** Till Jan 29