Many equity investors start betting on the Budget for picking stocks a couple of weeks before the event and their activities peak out on the day of announcement. Anticipation and perception differ widely among the investors and traders and hence, off late, the market becomes extremely volatile on the very day. However, it is seriously doubtful whether many investors made substantial wealth by accumulating the “Budget stocks”.
In the stock market, Budget is normally forgotten by most of the equity investors within a couple of weeks and their worries come back to other domestic fundamentals and global factors. While it is a tool of fiscal policy, the equally important monetary policy is the domain of the Reserve Bank of India. In the last few decades, the tax policies have been fairly stabilised, leaving the scope for only marginal changes in the tax rates. Some of the key changes in tax policies often happen outside the scope of Budget also. Recent hike in the import duties on steel products, which had a significant impact on the earnings of the steel companies, was a classic example.
In the last 10 years, the gains in the whole market or in select stocks on the eve of Budget were not sustained in the next one month in a majority of the cases. Some years ago, when a nominal hike was announced in the Budget outlay for the education sectors, some education stocks flared up immediately. Same stocks fell down as much as 90% in the next couple of years.
Of course, the Budget plays a key role in deciding the quantum of public sector investments and in providing appropriate incentives to the private sector investments. Budget brings clarity – whether the government is more concerned about the growth or social welfare or opts for a balanced one. It also gives clear signals for some sectors in terms of fiscal incentives or disincentives.
May be for the active day-traders, it makes sense to play on Budget anticipations or announcements on “absolute” hikes in outlays. However, for the investors, it would be better to wait for the final print of the Budget and understand whether it is pro-growth or populist. Then try to learn whether the announcements on changes in taxes and duties, and on outlays would alter the EPS (earning per share) of the companies operating in those relevant sectors quite significantly. Otherwise, accumulating the stocks merely based on “nominal” changes, which are perceived as “positive” or “negative” without any care on valuation would only lead to destruction of wealth of the retail investors.