Budget Blues - Can the Indian Budget have a long-term impact on investments in the stock market?

Posted On Saturday, Mar 01, 2008


Another year, another budget... We are at that time of the year again when a lot of turbulence is seen in the capital markets. Yes, its time for the ‘Budget Effect’. Share prices of companies that seem to have got a raw deal in the budget or are perceived to have their competitiveness or profitability eroded are hammered down. Others that are ‘beneficiaries’ are bid up beyond reasonable levels. This year is likely to be no different. The situation is made even more interesting by the weak cues in the global markets and the rush by Foreign Institutional Investors (FIIs) to withdraw money from India. According to SEBI, FIIs have already withdrawn over $2.8 billion from the Indian equity markets during the first 2 months of 2008. In the same period, the Sensex has fallen by over 2,700 points (13%).

We are not going to talk about which companies are going to be battered and which are likely to give an upside. You can read about that from any other financial or mainstream newspaper. What most investors would like to know is ‘Does the Indian budget have any impact on investments in the long term?’ Let’s go back a decade and see what difference the various budgets made to the Sensex.

Table I – What should you do the day after the budget?

S.NoDate of BudgetGovernment1 day % change in sensexSensex % change over 3yearsYour action on day after budget
11-Jun-98NDA-1.19%-3.49%Money in the bank was better
227-Feb-99NDA8.97%14.59%Money in the bank was better
329-Feb-00NDA-5.11%-42.91%Money in the bank was better
428-Feb-01NDA4.36%44.39%Should have bought stocks
528-Feb-02NDA-3.87%81.18%Should have bought stocks
628-Feb-03NDA0.19%216.42%Should have bought stocks
7(a)3-Feb-04NDA-1.31%154.86%Should have bought stocks
7(b)8-Jul-04UPA-2.26%203.59%Should have bought stocks
828-Feb-05UPA2.19%167.57%Should have bought stocks
(for 2 years)
Should have bought stocks
(for 1 year)
Should have bought stocks

BSE Sensex has been taken as a representative of the Indian Stock Market. “1 day % change in Sensex” has been calculated on change between previous closing of the BSE Sensex before the budget and the next closing. The "Sensex % change over 3 years" has been calculated on change between the previous closing of the BSE Sensex before the budget and the closing 3 years hence. For the 06-07 and the 07-08 budgets, the calculations have been for 2 years and 1 year respectively. For 05-06, 06-07 and 07-08, the closing of BSE Sensex has been taken for Feb 29, 08.

The first 3 years (from 1998-99 till 2000-01) were dismal for any kind of investor– short term or long term. But then again, it would have taken a very patient investor to shrug off the sluggish movements of the Sensex till the Bull Run began in early 2003.

Now the picture is clear. If you invested in mutual fund just before the ‘01 and ‘02 budgets (even before the bull run), you would have racked up handsome gains in the longer term compared to a 1 day trade. Since ‘03, FIIs have invested over $48 Bn in the Indian equity markets. From ‘03, you could have had triple digit long term returns for every year till ‘05. The 2-yr and 1-yr returns for every budget since‘05 are also impressive.

Mr. Market

The first 3 years (from 1998-99 till 2000-01) were dismal for Caught up in the heat of the moment, a lot of investors tend to overlook the fact that the Indian Union Budget is just one of the factors that move the financial markets. Capital flows, regulatory environments, global economic scenarios, political and socio-economic situations, investment policies and interest rates are just a few of the other factors that determine the growth or decline of the financial markets. Benjamin Graham, the father of value investing used an imaginary investor called Mr. Market to demonstrate his contention that a wise investor chooses investments on their fundamental value rather than on the opinions of others or the direction of the markets.

Graham asked his students to imagine owning a share in a business in partnership with others. One of the partners, Mr. Market, is somewhat of a neurotic who on any given day will offer to buy your share or sell you his at a specific price. His moods can fluctuate anywhere between incredible optimism and overwhelming depression. One day he will nominate a higher price to buy or sell, the next day he might increase it, lower it, or even appear uninterested in whether he buys or sells.

The point that Graham made is that Mr. Market’s judgment is formed more by mood swings that by rational thought and that this gives the wise investor buying and selling opportunities. If Mr. Market’s price is unreasonably high, then wise investors have the opportunity to sell. On the other hand, if it is unreasonably low, then they have the opportunity to buy. The important thing is that successful and careful investors make their own decision, based on their own ideas of the worth of the investment.

Keep investments simple

We reiterate what we have been always saying - The Indian markets offer great potential for the long term investor. Select and invest in companies that have solid fundamentals. In the long term, unless there is a significant change in the operating environment or an erosion of the competitive advantage, these companies would give you superior returns.

Markets rise and fall. Even the most skilled and experienced practitioners are hard put to identify the absolute highs and lows of stocks. Wise investors would not be unduly swayed by market fluctuations or by fanciful products offered by many distributors. They would use volatile times as opportunities to buy wisely when prices fall sharply and sell wisely when they advance a great deal.

Above article is authored by Quantum.

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