BUDGET AND THE MARKETS, REALLY?

The annual season of pre-budget expectations and discussions around how this budget is going to be trend setting for the Indian Markets and the Indian Economy have been buzzing for the last few weeks now. After having watched Budgets being presented as I have been working in the field of investments for the last  20 years now there are two things that I can conclusively say-

1. The impact of the Budget speech on the markets is vastly exaggerated.
2. The trends in the markets are long term in nature and the Budget is an annual event. Normally events in a trend never have the ability to change the trend

That said, a vast majority of traders, Rating Agencies, brokerages etc give a lot of importance to the event. We can say that the annual Budget exercise could have been very important when we were living in a closed environment and India was a closed economy. Now that the economy is open and most of the products can be freely imported and exported and there is very little to do on the indirect tax front the Budget should be treated as just one factor among many. Just to take a recent example, the first budget speech of the current Finance Minister in July last year was considered to be a letdown with not too many takeaways. However did it impact the long term direction of the markets? It did not. Infact in the last 20 years the markets have fallen 11 times in the month following the Budget and risen 9 times.  

So does this indicate that the Budgets were good only 9 times in the last 20 years or were bad 11 times?  Moreover 6 times out of the 11 times it was negative the markets gave a significant positive return for the full year.

Now what should we conclude from this data. I believe that the Budget in India has become an annual exercise where the government of the day puts out its agenda and thinking for the economy. There are a lot of things said in the Budget speech which are supposed to be followed up and done by various ministries who work independent of the Finance Ministry. Implementation of the things spelt out by the government, the growth rate of the economy, inflation, interest rates, and global factors i.e. all the standard factors have a much bigger impact on the performance of the markets than the Budget.

There should ideally be no change in investment strategy because of the Budget. The trends in the economic growth cycle as well as stock market moves are long term in nature. Negatively perceived events create correction in Bull Markets and positively perceived ones corrective up moves in Bear Markets. Ultimately markets are slaves of earnings and if economic growth is strong and earnings beat expectations markets tend to do well.  These days there is another major factor that affects the performance of stock markets globally and that is the Quantitative Easing programmes of various central banks. With economy growth anaemic globally most of this money is flowing into bonds and equities and this event has become more important than any other for the performance of global equities in the near term.

Near term market outlook seems more dependent on Global factors related to the movement in Oil prices, the crisis in Greece and Russia as well as the expected pace of tightening by the US FED. My view at the beginning of the year was that the first half of the year 2015 is tricky for the markets and we should see a better performance in the second half. I still believe that we need to be cautious till April/May by which time we should have clarity on lot of things.

In conclusion trade or invest based on the Budget at your peril. It is unlikely to impact long term stock market returns in any way.