Can Budget fuel the decade-long Nifty50 rally?

With the end of 2020, the second decade of the twenty-first century is complete. The Nifty 50 has been surging strongly over this period, excluding few short-lived dips. The absolute gains in the index between January 2011 and now is 136 per cent and amounts to compounded annual return of 9 per cent per annum.

Which stocks and sectors led this rally? How did the index change in the past decade? How can the Budget aid the rally?

How Nifty50 transformed

While the Nifty 50 may not be the barometer of the economy, it is a good gauge of the sectors that performed well in the last 10 years and those that faced head-winds.

With most infrastructure companies having taken large debts which they were unable to service given the irrationally high revenue projections, infra behemoths such as Jaiprakash Associates and Sterlite Industries struggled to stay afloat and hence witnessed sharp erosion in stock price, making them exit the Nifty50 since 2011.

Steel and cement companies were impacted by decline in capex and SAIL, ACC, Ambuja Cements etc too found fewer takers.

The rise of the financial services was reflected in the entry of Bajaj Finance, Bajaj Finserv, HDFC Life and SBI Life in to the benchmark. Recent penchant for FMCG and paint companies made Asian Paints, Nestle, Britannia etc find a place in Nifty 50.

Stocks that led the rally

While Reliance Industries has taken the leadership in the stock market in recent times, there were others that delivered consistently between 2011 and 2020. Of these, Kotak Mahindra Bank is the leader, delivering 27.7 per cent average returns per year. HUL is next on the list with investors flocking to the defensive stock due to the visibility in its business and strong balance sheet. Strong companies with low leverage and sustained earnings growth such as HDFC Bank, Maruti and HCL Technologies have also been quite sought after over the past decade. RIL, due to the under-performance until 2017, ranks ninth on the top performers list, with CAGR of 14 per cent.

And there were many that destroyed investor wealth too in this period. Leading the list are the ADAG companies – Reliance Capital and Reliance Communications.

Budget 2021

Will the Budget offer any sops to sustain this rally? With the Centre’s fiscal deficit expected to be between 7 per cent and 8 per cent in FY21 and around 5 per cent in FY22, this is highly unlikely. Also, large corporate tax cuts were done in September 2019, leaving little room for further relaxation on this front.

However, hope floats high in stock markets and some market participants are asking for removal of the long-term capital gains tax on equity and equity MFs. While that is a tall ask in the current conditions, introduction of indexation in calculating LTCG on equity and equity mutual funds can be quite a booster for investors. Some relaxation in taxing dividend in the hands of the investors would also be welcome.

Market participants are also demanding reduction in the Securities Transaction Tax and the Commodities Transaction Tax, but again that is unlikely since STT revenue have been quite robust this fiscal thanks to the booming turnover on stock exchanges. The FM is unlikely to tamper with this source of revenue.

Any further easing of rules governing FPIs will be also be welcomed by market, since these investors have been supporting the rally of late.

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