We are just a week away from the Union Budget 2023. How do we know what kind of expectations are being factored in by the stock markets in the run up to the event?
Elsewhere in the world, people won’t even ask this question because in most countries the Budget presentation is no big deal. The Budget is simply a statement of government finances and the markets don’t bother so much about it because it does not come with any significant surprises.
But in India, the Union Budget is a closely watched event by the stock markets. Here, tweaks in taxes and government spending can often direct the growth trajectory, especially in years when private investments and consumptions are weak.
Agreed, stock markets are only a small part of the Indian economy and, many a times, the forces that govern the stock-market performance are far removed from the real economy and it is not impacted by what the government may or may not do. But, in the short-term, the Union Budget continues to be a big event for which traders position themselves, building in expectations from the finance minister’s announcements into stock prices.
The post-Budget reaction is therefore a commentary on what is factored into the stock prices prior to the Budget. To track this market behaviour, we, at Moneycontrol, bring to you a novel barometer - the Moneycontrol Budget Sensitivity Index or MC Budex.
How MC Budex is built
MC Budex captures how expectations from the Budget are getting priced into the stock market. How did we pick the index constituents and construct this index? Well, the index constituents have been picked after conversations with dozens of stock-market participants, and after back-testing data for the past seven years to see which segments of stocks were most sensitive to the Budget relative to the rest of the market.
To back-test, we first saw how each of the BSE thematic and sectoral indices performed 30-days and 45-days prior to the Budget and five days after the Budget. And then, we tried to find out which sectors and indices were the most sensitive towards the Budget.
The back-testing results only reaffirmed what we intuitively knew. The index has thus a sprinkling of stocks from the infrastructure universe, including defence and railways, public sector undertaking, including some divestment candidates, banks, consumer staples, and discretionary companies, and agriculture and fertiliser industries.
The stocks in the index are sensitive to the Budget either because policy changes and tax tweaks can directly impact their financial performance, or can indirectly impact their financial performance by way of a change in consumption or investment activity in the economy.
Budex has been built up giving equal-weights for the 30 chosen stocks to ensure that the index is not skewed by mega-cap and large-cap companies. Instead, the index captures the broad market action, be it driven by small stocks or the big ones.
What does Budex tell us
The Budex, which has a base of 100 as on December 1, is down 7.5 percent to 92.67 as of January 24. Since January 1, it is still down about 2 percent. There are really no big negatives coming from the global markets, although you cannot say everything is hunky dory. But the fact is that the Nasdaq is up 10 percent year-to-date, S&P 500 has gained 5 percent year-to-date and Dow has also gained 2 percent this year.
Other economies like China, Hon Kong and emerging markets have also gained. This indicates that the market is rather going in with some level of trepidation into the Budget. Of course, the talk is that there could be some tinkering of the capital gains tax which the market really fears. It’s very hard to call this one because we do not know where the finance minister will peg the gains and losses for stock market investors with respect to the other priorities for the country, especially in the context of slowing deposit growth for banks.
We will keep you updated on market expectations from the Budget through the next few days so that you could approach the Budget knowing whether the market is pricing in lofty expectations or going in with pessimism and position your trades accordingly.
