Budget bets seldom work

Investing in stocks or index pre- or post-Budget for quick gains can stump even seasoned investors

A few years ago, G Chokkalingam, founder, Equinomics Research & Advisory, bought an oil company stock based on the Budget announcements, as it appeared to be positive for the scrip. But, when he referred to the Finance Bill, he realised the policy move was, in fact, negative for the company. By then, the stock had already tumbled far below his buying price. 

Investing on stocks or the index pre- or post-Budget for quick gains can often stump even the most seasoned investor. “We did a study two years ago of what analysts said immediately after the Budget and a few hours later. Many of them were contradicting themselves by the evening,” says Arun Kejriwal, director at Kris Research. Retail (small) investors looking for cues from these analysis can easily find themselves in trouble. 

In the run-up to the Budget, the fear amid investors is palpable. Since 2006, the S&P BSE Sensex has delivered positive one-month returns only once. This period includes two interim Budgets due to by-elections.

A month after the Budget, it is a  50-50 case. The Sensex has showed positive returns 50 per cent of the times. Two months later, it had given double-digit returns (annualised) eight out of 12 times. Similar positive trends are visible in broader indices like the Nifty, S&P BSE 500 and S&P BSE MidCap.

Investment managers say the markets may have underperformed in the past in the run-up to the Budget because of low foreign institutional investor (FII) participation in the initial months of a calendar year. FII inflows usually reduce in December because of the long holidays abroad. When they come back in January, they wait for the Budget to get clarity on the government’s policies before committing fresh money. As U R Bhat, managing director, Dalton Capital Advisors (India), says: “Long-term investors take a fresh look at their portfolios after the Budget. They study the impact of government policies, duties and other measures before tinkering with their investments.”

Budget has become more secretive: Says Chokkalingam: “A few years ago, experienced investors could take calls on a few expected announcements based on available information. That has become tougher.” He points out that the Economic Survey released before the Budget would talk about the state of the economy and the direction in which the government planned to take it. For a long time, some of the information provided in the Survey gave a clue to likely announcements in the Budget. For the past four years, the Survey no longer contains any specific information that can help punters take calls on stocks.

Delayed buying won’t hurt, ignorance will: On the Budget day, there’s a lot of frantic buying and selling, based on announcements. But, there’s rarely complete clarity on the likely impact of these announcements on stocks that very day. There is a lot of information flowing about on the Budget day on the impact of announcements on sectors and companies. But, unless you have done your analysis, avoid buying.

After the Budget, wait for a day or two until there’s complete clarity on the government’s policy decisions. “By the time an investor understands the impact on a sector or company, it is possible the stock may be up a few per cent and you would end up paying a premium. But, that’s fine, compared to buying without having complete information, which can lead to loss of money,” says Ambareesh Baliga, an independent expert.

Sectoral play may work better: A good starting point would be to adopt a top-down approach, wherein you first check the impact on the sector and then look at which companies within it stand to benefit. Say, if the finance minister announces sops for affordable housing, there would be an impact on housing finance companies, construction firms and cement manufacturers. If tax slabs are 

increased, more money in the hands of people would mean non-discretionary spends may rise, which would be positive for consumer goods companies and automakers. But, then narrow down to understand how individual companies’ earnings will be impacted in the near future.

Sometimes, the government’s policies are directed towards its own programmes, and private players may not benefit from these. During one United Progressive Alliance (UPA) Budget, the finance minister had increased the education outlay significantly. Immediately after the announcement, investors rushed to buy stocks of companies in the education space. Only later did the realisation dawn that the government’s spending would be directed more towards anganwadis and government-run schools. Similarly, stocks of fertiliser and irrigation companies witness increased buying during most Budgets, though private players might get no benefit.

This year, for the first time in many years, the markets are likely to deliver positive returns in the one-month period before the Budget. “There has already been a rally before the Budget, as investors have a lot of expectations from it. Many of these investors may be disappointed, as the government cannot dole out sops without increasing its income from another avenue. There could be a sharp correction in the market after the Budget,” says Baliga Investment advisors suggest investors should use this opportunity to book some profits or offload stocks they no longer wish to hold in their portfolios.

Futures and options play: All investment managers unanimously advise both small and seasoned investors against dabbling in derivatives. If an investor thinks he is confident about an announcement which would impact a company’s share price, he should buy in the cash segment. “Investors have the mentality that at most they will lose the premium if a bet goes wrong, but if it goes right, they will make much more. They don’t realise the risks involved,” says Kejriwal. 

As far as regular mutual fund investors go, the simple strategy is to continue investing through Systematic Invesment Plans. Use lump sum only in tranches.