Federal Budget 2024: According to a study by Capitalmind Financial Services, India’s top 500 companies have given investors an average return of -0.1% during the 24-day budget period since 2000.
In a statement, the SEBI registered portfolio manager said the Union Budget is an “inappropriate forecast of annual revenues” and added that long-term investors should avoid taking market decisions based on Union Budget expectations and announcements.
In effect, the study found that budget announcements have little impact on stock prices and are therefore not the most influential indicator to track when choosing investments.
“In the long run, it’s the fundamentals that matter, not the budget.”
“Our research suggests that while there tend to be large fluctuations ahead and immediately after the budget announcement based on expectations, in the longer term it is driven by the underlying fundamentals of corporate earnings growth,” Anoop Vijaykumar, head of investment and research at CapitalMind, said in a statement.
He added that long-term investors “should avoid taking major equity allocation decisions based on the projections and announcements made in the Budget. Rather, they would be better off keeping their financial goals in mind and staying on track with their investment plans.”
Examples of market reactions to budget announcements
A Capitalmind study gives four counter-intuitive examples to explain how markets have reacted to budget announcements over the years, noting that markets remain unpredictable on the day of the budget announcement and that annual performance cannot be extrapolated based on the budget’s impact.
- In February 2003, the NDA government’s budget announced new taxes including state-level VAT and service tax. On the day of the announcement, the CNX500 rose 0.5%, but a month later it fell 6%, and a year later the market had doubled.
- On July 8, 2004 (an election year like this one, the entire budget), the UPA government abolished long-term capital gains tax on stocks and introduced a securities transaction tax (STT). This announcement meant that gains from stocks and mutual funds older than a year would become tax-free, but despite the positive news for investors, the CNX500 fell 3.2% that day.
- In February 2015, the NDA government announced a roadmap to reduce corporate tax to 25%. However, this news, which would directly boost corporate profits, caused the CNX 500 index to rise just 0.4% on the day of the announcement, but fall 3.6% a month later and end the year down 18.7%.
- In 2018, the NDA government reintroduced a 10% long-term holding tax on profits over $1 million per year. ₹10 lakh crore, the CNX 500 was down 0.1%. A month later it was down 4.6%.
Other important observations
- The highest return investors got on the budget announcement date was 4.1% on February 1, 2021, the survey noted.
- The worst return for investors was recorded on July 6, 2009, when the index fell by -5.4%.
- There was cautious movement in the run-up to the Budget announcement, with negative median returns seen one month (-2.2%) and one week (-1.4%) prior to the central government’s budget announcement.
- The survey “mirrored” investor behaviour one year before and one year after the Budget announcement and found that 63% of investors reduced their exposure due to uncertainty, and then 62% reinvested when uncertainty receded after the Budget announcement.
- Investing one day before the budget announcement would result in a “coin toss” return on investment one month later, with a 54% chance of being negative.
- The likelihood of positive returns over a one-year period is in line with the overall stock market performance.
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