Market Performance Before and After the Budget

The first month of a New Year is usually volatile due to the onset of quarterly earnings and the upcoming Budget. This year too, Nifty50 has remained volatile moving directionless within a range.
In the previous week, I mentioned what surprises we can expect from the government in the Budget. Today I touch upon the market movement during this phase.
Let’s have a look at some past data!

Budget Date Budget Day % Change Day's Volatility Previous Week Returns % Next Week Returns %
Feb 26, 2010 1.29% 2.75% 1.60% 4.10%
Feb 28, 2011 0.56% 3.17% -3.36% 3.52%
Mar 16, 2012 -1.16% 2.65% -0.29% -2.51%
Feb 28, 2013 -1.79% 3.14% -2.72% 4.44%
Feb 17, 2014 0.41% 0.70% 0.33% 2.09%
Jul 10, 2014 -0.23% 3.37% -1.91% 1.27%
Feb 28, 2015 0.65% 2.17% 1.68% 1.68%
Feb 29, 2016 -0.61% 3.94% -3.42% 7.13%
Feb 1, 2017 1.81% 2.17% 1.32% 0.71%
Feb 1, 2018 -0.10% 2.19% -0.48% -5.10%
Feb 1, 2019 0.58% 1.57% 1.05% -0.04%
Jul 5, 2019 -1.14% 1.56% 0.19% -1.89%
Feb 1, 2020 -2.51% 3.30% -3.77% 3.17%
Feb 1, 2021 4.74% 4.94% 0.30% 5.80%
Feb 1, 2022 1.37% 2.19% 1.73% -0.64%
15 Budget Average 0.26% 2.65% -0.52% 1.36%

Empirical data suggest that a week before the Budget day, Nifty50 returns have mostly been negative. Eight times out of 15 Budgets, the index delivered flat or positive weekly returns. However, the average return during these 15 Budgets was -0.52%.
Empirical data suggest that a week before the Budget day, Nifty50 returns have mostly been negative. Eight times out of 15 Budgets, the index delivered flat or positive weekly returns. However, the average return during these 15 Budgets was -0.52%.
The main reason behind this phenomenon is the uncertainty regarding the Budget. Investors tend to tread lightly before the event. Profit booking by the market participants causes the prices to plunge a week before the Budget, discounting all the fears that investors have.
The two main budgetary scenarios are a hopeful Budget and a dismal Budget. However, as you can see from the table above, the index has often generated gains in the subsequent week.
A make-you-happy Budget is going to make the market leap, while a not-so-good Budget was already discounted by the investors. Either way, the market reacts positively after the event since uncertainty is out.
An example of the same, in 2020 Nifty50 fell by 2.51% on the day of the Budget. The next week the index recovered by 3.17%. Meanwhile, in 2021, the broader index remained flat, while witnessing a 5.80% rally a week after the Budget day.
Therefore, the Budget is an event which leaves the markets jittery usually causing the indices to slump. It thus remains a favourable time to invest in the stocks which have corrected. Investors should keep a watch on companies which are fundamentally strong with healthy growth prospects.

Technical Outlook

Nifty has ended the week with a cut of 2.35% in 4 trading sessions. The index has broken below an important support of 17,800. It was holding above this support level for the last one month. It has formed a reverse flag formation and broken this support. This indicates that there could be further selling pressure. In that case, the index could drag lower to 16,750 levels. Immediate support for the index is placed at 17,500 levels. Resistance for the index is placed at 17,800 levels

Expectations for the Week

Next week is going to be an action-packed week with the Union Budget set to be announced on 1st Feb. All eyes will be on the finance minister’s last full budget before elections which will continue to keep the markets volatile. Furthermore, individual stock movement will be affected by the ongoing quarterly earnings. Globally, the FOMC meeting will attract market participants’ attention. The unemployment rate will be released next week and the markets will try to decode the global economic situation. Investors should remain cautious and invest in fundamentally strong companies.

Union Budget 2023-24 – A No Surprise Budget?

The country and in fact the world during the past two union budgets were under the grasp of covid-19 pandemic and the Russia-Ukraine crisis. The Upcoming Union budget which is set to be released on February 01, 2023, would be amid a relatively stable economic and macro environment. This makes the forthcoming budget interesting to analyze. Amid less short-duration speed breakers the government can turn on the high beam lights and focus on the longer trajectory.
The most talked about thing of the upcoming budget is that it is the last full-year budget before the 2024 general election. Thus, a host of populist schemes would be announced. But considering the government’s past track record and current limitations (in the form of a high Gross Fiscal Deficit/Gross Domestic Production and committed expenditure) it is unlikely the center would go overboard.
However as evidenced by the latest few quarterly results although the demand for premium products has been strong, the low and mid-segment products are witnessing poor growth. This is a classic example of a K-Shaped recovery where the economically lower segment has not been able to make a significant comeback. This would push the government to increase allocation to the rural economy and ensure it is well-oiled. Beaten down sectors like FMCG, Two-Wheelers companies & Staples would be benefitted.
The Government is expected to continue its momentum of capital expenditure. It had budgeted a high Capex of INR 7.5 Lakh in FY23 and it is likely to see a double-digit rise in FY24. The private Capex has been muted and thus a strong public sector Capex becomes important. Defense, railways, and roads could continue to witness significant allocation. Capital goods and Cement sectors would continue to remain in the spotlight.
Make-in-India would be another theme that could be at the center stage. We could see custom duty cuts in commodities where indigenization and value add are gaining pace. Further, a tax hike on imported finished goods could be on cards to aid local manufacturers. Chemical companies and electronic manufacturers are key beneficiaries.
There are talks of a possible change in the capital gains tax structure in order to bring uniformity across asset classes. This has spooked the equity investors on a possibility of an upward revision. The Government would certainly look for a new revenue stream to boost its tax-to-GDP ratio but any upward change in LTCG Tax is unlikely. As it could have a significant impact on the Indian equity market which is already fighting against the FII outflow.
In the 2019 Budget, Finance minister Nirmala Sitharaman fulfilled her late predecessor Arun Jaitley’s promise to cut the corporate tax rates. And, also assured relief for individual taxpayers. This appears to be the right time to revise 80C limits or rejig tax slabs as consumers are facing pricing pressure. Also considering the upcoming general elections the timing seems just right to implement this.
The Market would expect the budget to be a fine balancing act between macro stability and growth. Any Bias towards one could result in an eventful day for the stock markets.

Year Budget Day Nifty Single day % change
2012 16th March 2012 -1.2%
2013 28th February 2013 -1.8%
2014 10th July 2014 -0.20%
2015 28th February 2015 0.6%
2016 01st February 2016 -0.10%
2017 01st February 2017 1.80%
2018 01st February 2018 -0.10%
2019 05th July 2019 -1.10%
2020 01st February 2020 -2.50%
2021 01st February 2021 4.7%
2022 01st February 2022 1.37%

Technical Outlook

NIFTY50 on the daily chart has found resistance near the upper band of the Triangle pattern and prices witnessed some profit booking after showing a fine up move from 17,880 to 18,183 levels. The broader range has been the same but buying has emerged on the daily chart where the index has shown optimism to sustain above 18,000 levels. The indicators and oscillators are turned flat without indicating any short-term directional move. The momentum oscillator RSI (14) attempted to move above 50 levels but the attempt failed as the index was not able to close above its previous day’s high. Nifty on the weekly chart is placed between a broader high-low range of 18,200 -17,800 levels from the past 4 weeks. Furthermore, the price is also trapped between the 9 & 21 EMA bands which suggest a break on either side will decide further directional move in the index.

Dissecting Index Performance over the Last Decade

The benchmark indices get a lot of media attention for their performance or lack of it. However, just looking at the benchmarks isn’t enough. You must look beneath the hood to know what is actually going on in the market.
We have recently entered the new calendar year. It’s a great time to dissect index performance over the last decade and see what is contributing to its returns. Sensex has generated a compounded annual growth rate (CAGR) of 12% over the last 10 years.
The below chart shows ranks major sectoral indices along with their annual returns for each year over the last 10 years. Here are some of the key observations.

Information Technology Index has been the best performer over the last 10 years. Remarkably, the tech-heavy index grew at a CAGR of 18% during this period.
IPOs have always kept the stock market excited. Despite coming at lofty valuations IPO’s have done well over the last decade with a 17% CAGR.
Midcap and Smallcap or Kachra caps as they are popularly called have delivered superior returns due to their tendency to grow at a faster pace.
Sensex has gone through two Lok Sabha Elections, Taper Tantrum, Demonetization, GST, China Slowdown, Covid crisis, and much more in the last 10 years and still delivered a CAGR of 12%.
Capital Goods is an average performer and is mostly placed in the middle of the table. Healthcare and FMCG stand true as defensive sectors with positive returns in 7 and 9 out of the last 10 years respectively.
Auto and Oil&Gas have given below average CAGR of 10% and 9% over the last 10 years.
Making money in Realty and Metals is difficult because of their cyclical nature. They will feature mostly near the top or bottom of the table. So you must get your timing of entry and exit right always.
Making money in Realty and Metals is difficult because of their cyclical nature. They will feature mostly near the top or bottom of the table. So you must get your timing of entry and exit right always.

Closing Thoughts
Benchmark indices are the best proxy to investing in equities. But knowing only the benchmark returns isn’t enough. Real wealth lies one level beneath the surface. You must learn to scratch it in the right way to seek pearls of wisdom.
Some sectors like IT are structural performers and have delivered phenomenal returns over long period of time. Even if you entered at the worst possible time you would have still made money if you hold on for long term.
On the other hand sectors like Metal and Realty are cyclical in nature. If your timing of entry or exit isn’t correct then you wouldn’t make money even if you hold for long term.

Expectations for the week
Next week, China's yearly and quarterly GDP figures will be released, providing insight into the country's economic recovery path. With US inflation coming in at 6.5% the focus would now shift on the Fed's next move. Back home, quarterly results will drive market sentiment and will be the buzz next week as they accelerate. Nifty50 closed the week at 17,950 up with gains of 0.5%.

Technical Outlook

The Frontline Index for the past 4 weeks is trading in a very narrow range from 18300 to 17800 levels. The present scenario for traders has become very difficult because volatility in the market has increased but the trading range has decreased.
Nifty on the weekly chart has formed a Doji candle stick pattern and the wicks of the candle were of equal size on both ends indicating indecision among the traders.
The benchmark Index this week has made a couple of attempts to breach 17,800 – 17,780 levels but was not successful as prices were continuously finding support near that zone.
Currently, traders should wait patiently for the prices to break above 18,150 or below 17,800 levels to initiate the next actionable move because presently market is in no trading zone.

Time for FIIs to Comeback in 2023!

The Indian cricket team started the year with a bang securing a nerve-wracking win over Sri Lanka in the final over. However, the markets got bowled out in the first week of the new year with Nifty50 closing with a cut of 1.36%.
The broader index ended December on a sombre note, losing 3.5%. In December, Foreign Institutional Investors (FII) have withdrawn every single day barring one instance on 6th December, displaying their pessimism.
In fact, the year 2022 saw FIIs pulling out a massive Rs. 2.75 lakh crore from the cash market. However, Domestic Institution Investors (DIIs) balanced it as they stacked in a mammoth Rs. 3.07 lakh crore.
The huge withdrawal from FIIs could be attributed to a rise in the US 10-Year Bond Yields. These bonds yielded less than 1% during the Covid-19 pandemic. As inflation soared, the Fed hiked the interest rates driving the bond yields to a 14-year high at above 4% in October’22. But how do these US Bond Yields affect Indian Indices?
Bonds are an alternative investment option for FIIs to lower their risk. When the Fed hikes the interest rates, the bond prices go down and the yields begin to rise. An increase in the bond yields would mean FIIs shifting their investing paradigm from equity to debt markets. When the bond yields started to rise in 2022, FIIs withdrew their money from Indian markets. In fact, 2022 witnessed higher cash outflow by FIIs from equities compared to the Global Financial Crisis of 2008.
The following chart shows the US 10-Year Bond Yields, Net Investments of FIIs and Nifty50’s movements since 2020.
Taking a closer look at the chart, we can observe that when the US 10-Year Bond Yield began to climb from 1% to 4%, the FIIs Net Investments in equities started to decline while Nifty50 remained volatile.
Fed’s December hike rate was already discounted by the bond yields and they remained range bound barely touching the October highs of 4%. With inflation waning, these hikes are expected to ease. In turn, the bond yields will begin to fall, making FIIs flock back to Indian Markets.
Since Calendar Year (CY) 2002, there have been only three instances where FIIs withdrew from the equity markets. In the immediate next CY, FIIs invested aggressively and Nifty50 delivered double-digit returns. 2022 marked the 4th incidence of large cash outflow by FIIs.
If history repeats itself, we might witness FII inflows with double-digit gains in 2023.

Technical Outlook
Nifty50 remained volatile this week and kept trading below its important psychological levels of the 18,000 mark. On the daily chart, the index has breached its smaller degree trend line support which is placed at around 18,050 levels and post that significant selling was witnessed.
If we observe a broader time frame (weekly chart) the front-line index is trading between the 9 & 21 EMA which is placed at 18,070 & 17,826 levels. From the past three weeks, bears are making a strong attempt to drift below 17,800 levels but the 21 EMA is acting as an anchor support for the Index. As in the first week of November 2022, Nifty posted a strong breakout above 17,600 levels and registered a life high at 18,887.60 without any meaningful correction. Presently, the current selloff can be considered a throwback of the bullish pattern.
The validity of the bullish pattern stands above the 17,600 – 17,500 levels. If in case the front-line index closes below these levels, then the gate is wide open till 17,200 – 17,000 levels. On the higher end, resistance can be observed at 18,250 levels. If the Nifty50 breaks those levels, it will trigger a buy signal towards 18,500 levels or even higher.

Expectations for the week
The week ahead will be filled with a slew of global economic data. Market participants will closely monitor the US and Chinese inflation figures. Back home, the focus will be on the quarterly results of companies. D-street will be keen to hear about future earnings growth trajectory from the management. Amid a host of important events coming up, investors are advised to remain cautious and prudent with their investing picks.