The Hindu Business Line : Looking beyond market gyrations

The Budget day calisthenics of stock prices would leave most investors nervous wrecks. 2007 has lived up to its notorious reputation. The Sensex closed the day down 4 per cent after being down 5 per cent at one point.

The market appears to have ignored the fact that the Finance Minister has bowed to the wishes of the investors and left the STT and capital gains tax unaltered. A rather tepid Budget simply exacerbated the bearish sentiment and the air of caution in the markets witnessed over the past two months.

Going back in time

If we travel back in time to re-live the budget day moves made since the year 2000, the steepest cut was received in the year 2000 when the Sensex tumbled over 5 per cent. There were no provisions that directly impacted the trading in the stock markets in that budget too.

The fall was solely due to large positions being built prior to the budget. The reversal on the budget day of 2000 was followed by the great technology meltdown and the level seen on that day was not re-visited till 2004.

It was Mr Yashwant Sinha once again in 2002 who spooked the stock markets and caused a 4 per cent fall with a rather lukewarm budget. In 2004, the introduction of the "small 0.15 per cent transaction tax on every trade on the stock exchanges" miffed the markets and triggered a crash. However, the hike in STT by 25 per cent in the Union Budget of 2006 was shrugged aside by the stock markets.

The run-up factor

The reactions of the stock markets to various union budgets drive home the fact that it is not the provisions in the Budget document, but the prevailing sentiment in the run-up to the Budget that determines the market's reaction to the budget document.

Does the budget day trend continue through the month following the budget session? That does not seem to be so.

There is no relation between the budget day trend and the trend in the Sensex in the month following the Budget presentation. In other words, the budget day does not determine the intermediate term trend.

A perusal of the Sensex' returns from the budget session to the end of the calendar year is more conclusive.

The returns have been hefty in the four years since 2003. The years between 2000 and 2002 delivered negative returns.

This goes to show that regardless of the gyrations of the budget session and the trend in the month following the Budget, it is the long-term secular trend that has the final word.

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