Will the markets see a pre-Budget rally?

In ten years, on only two out of twelve occasions, BSE S&P Sensex recorded gain during one-month period before Budget

As the Narendra Modi–led government prepares to present its maiden Union Budget on July 10, the markets have been range-bound and mindful of what the proposals could be and their likely impact.

This is the usual story. In only two of the past 12 occasions has the BSE S&P Sensex recorded a gain during the month before the Union Budget’s presentation.

Since 2004, when the Manmohan Singh–led United Progressive Alliance (UPA) assumed office, on three occasions — 2007, 2009 and 2013 — the S&P BSE Sensex lost more than five per cent. In 2008, 2010, 2011, 2012 and 2014, the 30-stock bellwether index delivered negative returns.

There were two Budget presentations in 2004 and 2009 each — an interim Budget in February prior to the general elections and the regular Budget in July, post-elections. Interestingly, in both past occasions, when the newly formed government presented the budget, the market had fallen between three and seven per cent a month prior to the event.

“The coming Budget could be important because of where India is placed cyclically, what the mandate for the government implies, and given that this is the first non-Congress government in a decade,” says Ridham Desai, managing director and head of India equity research at Morgan Stanley, in a recent report.

Adding: “While history suggests the Budget’s influence on short-term performance is declining, expectations (measured by pre-Budget performance) are still important in deciding what the market does after the Budget.”

Outlook
So, will this time be any different, since we have a new government at the Centre delivering its maiden Budget? Analysts seem to have a mixed opinion.

The market’s performance pre-Budget (i.e expectations from the Budget) has a bearing on its post-Budget reaction, they say.

Historically, if the market is up in the month before the Budget, it has almost a 90 per cent prospect of falling after the Budget, higher than the 60 per cent probability of a fall, regardless of whether the market is up or down before the Budget, analysts say.

Says Sandeep Nayak, executive director and chief executive officer, Centrum Broking: “The market is expecting a growth–oriented budget, which will give a fillip to the investment cycle. The expectations around the budget are likely to trigger a pre-budget rally and stocks in sectors such as power, infrastructure, state-owned banks and oil & gas sectors should rally around policy relief expectations.”

Rajesh Cheruvu, chief investment officer, RBS Private Banking, also believes it is likely a pre-budget rally will take place, particularly with the macro economic challenges due to the previous lack of policy action.

“The policy environment in India is now much more stable compared to a year before, which could provide appropriate policy responses in the event of persisting global risk aversion,” he says.

While some analysts do expect the markets to trend higher in the run-up to the event, Mayuresh Joshi, vice–president for institutional research at Angel Broking, suggests one needs to take cognizance of the near–term headwinds, due to which there might not be a pre-Budget rally.

“The markets are expected to remain choppy in the immediate term, given the F&O (futures and options) expiry, and we are already seeing some amount of short covering. Our view is that the pre-Budget rally, which a lot of people are expecting, might not come through,” he says.

"There are inflationary pressures building up with the developments in Iraq and the recent hike in freight rates. I think the markets will wait for the Budget to unveil the core, structural announcements before taking a directional call.

There is a strong possibility that post the F&O expiry this Thursday, the markets correct due to profit booking. The Nifty can dip to 7,150 - 7,200 levels. On the higher side, rise will be capped at 7,650 levels," he adds.