The markets are at an all time high - Nifty50 at above 14,500 levels and Sensex at above 49,500 levels. The indices have almost doubled since the March lows, an increase of 92%.
FII inflows, flush liquidity in the system, proactive action by central banks around the world and buzz around new stimulus by the Biden administration are driving the markets not only in India but around the world.
The sharp rise has taken most analysts by surprise. The quick turnaround in indices all over the world has given rise to a new breed of Robinhood investors.
The Nifty PE ratio is at very high levels of 34.55. It is natural that people will book some profits and take some money off the table.
Experts predict a correction anytime soon. Just a trigger point is required. In an interview to Bloomberg Quint, Renaissance Investments Pankaj Murarka said that a correction looks quite a possible event that could play out probably in late February or early March.
What could trigger this correction? The next big event which every one has its eyes glued on is the Budget to be presented on February 1, 2021.
It will be the first budget after the pandemic hit India early last year. Finance Minister Nirmala Sitharaman has set the expectations high.
“India would never in a 100 years have seen a budget being made in a virtual manner post the pandemic and the country is set to be an engine of global growth.”
Will the markets rise or fall after the budget? To answer this question we analyse the stock market returns 1 month prior to and after the Budget day for the past 21 years.
A budget is an estimation of receipts and expenditure of the central government over the next one year. It specifies allocations of various departments. It projects the borrowing plan of the government.
A budget defines the duties on products, taxes on income, exemptions to industry and other incentives. It gives estimates of fiscal deficit and GDP growth.
Resultantly, it impacts the earnings of companies and hence the share price. We have seen in the past that there is a build up to the budget day and then the market tanks or rises if the announcements are not as per the expectations.
Hence, we analysed the Nifty’s performance during 1 – month prior to the Budget as well as 1 – month post the Budget announcement for each of the year starting from 2000.
62% of the times over the past 21 years, after 1 month of the Budget Speech, the markets fell. The average decline was 5% during these years. However, in the times when it was higher the average rise was 7.3%
57% of the times over the past 21 years, if someone had gone long on Nifty 1 month prior to the announcement of the Budget, his average gain would have been 3.6% and almost a similar average loss (-3.9%) when the market moved the other way.
Investors were handsomely rewarded only 20% of the times when Nifty rose both times - the one month pre- and post-Budget periods. The average increase in the 1 month prior period was 3.2% and an additional 6.8% in the after 1 month period.
23% of the times it has fallen both pre and post the Budget announcement with the average fall being 4.4% post the budget and 2.4% in the 1 month time period leading to budget.
Interestingly, the market has behaved in the opposite fashion 60% of the time, meaning if the market has risen in the pre one month period then it falls in the post one month period and vice-a-versa.
It is important to mention that starting from the 2018 Budget, Nifty has corrected every time during the post 1 month period and 2 out of the 3 years in the run-up to the Budget announcement.
The year, 2018, is relevant because starting 2018’s Budget, excise duties were outside the purview due to the introduction of GST in July 2017.
To sum up, in 13 out of 21 years, one month after the Budget announcement date, the market has generated negative returns.
Will this year follow the same trend, more so when valuations are expensive? Let’s wait and watch!