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Whether you are just beginning to trade or are an experienced trader, chances are high that you are keenly observing how the stock market will behave before and after the Union Budget, which will be presented on July 23.
At Bajaj Broking, since we believe that BudgetSimpleHai, we have done this analysis and we’re sharing our insights with you in this blog in the simplest possible manner. So, read on.
The experience of the last two decades shows that traders start entering the stock market 7-8 days after the budget day. Once a budget is announced, traders take about a week to understand its impact. Therefore, they start increasing their buying significantly only after a week or so after the budget day.
Similar trends are expected before and after the announcement of the Union Budget 2024 on July 23. The other thing is volatility can be very high around the budget day, which means the market can move up or down sharply before and after the upcoming budget.
No one knows what a budget contains before it is announced. As speculations remain high, volatility too is high just before the budget. Similarly, many people react emotionally to budget announcements. Therefore, after the budget, the share market can be very volatile for a few sessions.
We can expect similar market behaviour this time around as well. For risk-averse individuals, it is best to not significantly increase their exposure just before budget announcements. It’s better to let the budget announcements happen and then analyse which sectors are positively and negatively affected. Based on this analysis, investors should take positions.
Introduction to Stock Market Reactions and the Union Budget
Needless to say, the Union Budget is one of the most important events for the stock market in India. The budget explains which areas the government will focus on. It also explains the government’s financial situation.
Moreover, it announces how tax laws will change for individuals and businesses. Hence, the stock market reacts to the budget. In fact, the market starts reacting to the budget many days before it is announced. Such reactions show people’s expectations of the budget.
Then on the day of the budget and after the budget, the share market continues to react because investors start analysing how budget announcements will affect their investments. That said, investors should keep a few things in their minds.
Typically, the union budget alone cannot tell them how the market or a particular company will perform over the next year. So if a trader thinks that he can assess his stock market returns over the next 12 months by just analysing the budget, he/she’s mostly mistaken.
This is because long-term returns from the stock market are a function of many variables; for example, strengths and weaknesses of a company, inflation, interest rates, etc. Therefore, it’s important not to react too much to budget announcements and calmly analyse how budget announcements can affect your investments and then take action.
According to reports, Finance Minister Nirmala Sitharaman will present the 2024 Union Budget on 23rd July. This Budget is expected to have announcements on policies, schemes, income tax rate slabs, and more that are likely to affect everything around us. To simplify this year’s Budget and to decode its impact on your life, your investment portfolio, and all that you do, we bring you #BudgetSimpleHai! Join us on our website or head over to any of our social handles to get the latest updates on the Union Budget as it happens. Read in-depth reports, watch videos, and get a clear understanding of what’s in store. Kyunki Bajaj Broking ke saath, #BudgetSimpleHai
The following points will tell you in a few words how the Indian share market has behaved historically before and after the union budget:
Historically, investors choose to sell before the budget day due to uncertainty about budget announcements. As per reports, investors reduce their investments in the share market before the budget day 63% of the time.
As certainty returns after budget announcements are made, investors start buying again. After the budget day, once the budget announcements have been made, investors start buying shares again 62% of the time.
The volatility tends to be high just before the budget. It tends to remain high for a few days after the budget.
If the stock market rises before the budget, chances are high that it will fall after the budget.
If you want to know about the main factors that determine the stock market reactions to the budget, find them below:
1. Fiscal Deficit: This means the difference between the government’s revenue and expenditure. If the fiscal deficit significantly changes, then the government may change its revenue or expenditure, which can impact the economy and stock market considerably.
2. Tax Rates: By reducing taxes, the government can allow people to save more money, which can increase their consumption. Generally, a reduction in taxes is seen as a positive signal by the stock market, and vice versa.
3. Government expenditures on key sectors: An economy has many sectors which depend a lot on government expenditure, like infrastructure, defense, healthcare, education, social welfare, agriculture etc. In India, the central government explains in detail during the budget how much it intends to spend on these sectors. If the government increases expenditure on these sectors, their stocks are expected to move up.
4. Projections about economic growth: During a budget, often the government shares its projections about economic growth. If those projections are higher than the expectations of economists, the stock market typically rises. However, if the projections are lower than expectations, the market may decline.
5. Changes in tax rates related to stock market transactions: Often the government announces changes in long-term capital gains tax (LGCT) and short-term capital gains tax (SGCT) during the budget. If these changes are favourable to traders, the stock market rises, and vice versa.
The following points explain the most anticipated budget announcements and their likely impact on the stock market:
1. As the rural economy is facing distress, the government may announce some measures to revive agriculture and improve the skills of rural youth.
2. Startups are under the pressure of “angel tax.” The government may give them some relief by either reducing this tax or completely removing it.
3. The government may announce more support for the manufacturing of electric vehicles (EVs).
4. The upcoming budget could give a boost to infrastructure by increasing the spending on digital infrastructure, transportation, water supply, and energy.
5. On healthcare, the government may double the number of beneficiaries under the Ayushman Bharat Health Insurance Scheme. If that happens, all Indians above the age of 70 will be covered by this scheme.
Expert Opinions and Market Sentiment Analysis
The Union Budget tends to have a huge impact on the stock market. If you are a trader, here’s what the experts think you should be doing:
The market tends to be extremely volatile just before and after the budget.
So, you can sit and let the budget pass by at least for a few days.
The budget will be presented on July 23. So, you can stop trading a few days before and not take a new position for a day or two after the budget.
Once the impact has settled down, then you should take positions.
Investors should think about the sectors that can be potentially impacted by the budget and then make a strategy:
1. If you are a retail investor, you should keep an eye on tax-related announcements. If the government decreases taxes, then it can impact sectors directly related to consumption, like FMCG. Should that happen, FMCG stocks are expected to rise after the budget.
2. You should also keep an eye on infrastructure stocks because the government is expected to give some sort of a boost to this sector.
3. Don’t over-rely on the budget for long-term portfolio strategy. As we already said, the budget alone can’t determine long-term returns from a company or the stock market. For that, we need to consider several factors, like a company’s strengths and weaknesses.
Case Studies: Notable Market Movements Following Previous Union Budgets
The following analysis shows you how the stock market has behaved before and after the union budget in recent years:
1. The average market return in the one week before the Union Budget has been around -0.45% since 2010. As this number is negative, it shows more people sold than bought in this time-frame and overall traders remained cautious.
2. Since 2010, the average market return in the one week after the Union Budget is announced has been around 1.3%. This proves that the investors return to the market once the budget is announced and the uncertainty is lesser.
If you are an investor in stocks, you’d agree that few events excite investors more than the Union Budget. As we get closer to the budget day (July 23), the uncertainty and hence volatility may increase.
If you are a long-term investor, the best thing to do is remain cautious. Don’t buy or sell too much around the budget day. On the day of the budget, pay attention to what the Finance Minister says about the sectors you’re invested in. Visit Bajaj Broking’s website because we’ll be bringing insights for you. Based on that, you can devise a sector-specific strategy and assess which stocks are expected to rise after the budget.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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