Union budgets poor predictors of annual equity returns: Capitalmind study

The best return was on February 1, 2021, with a 4.1 percent gain, while the worst return was on July 6, 2009, with a -5.4 percent decline.

Union Budgets, according to a latest Capitalmind study are poor predictors of annual equity returns.  According to the study, the CNX500 index provided a median return of -0.1 percent on budget days since 2000.

The best return was on February 1, 2021, with a 4.1 percent gain, while the worst return was on July 6, 2009, with a -5.4 percent decline.

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The study was based on market behaviour around budget announcements. They noted that investors seem to exhibit cautious behaviour around budget days, reducing exposure a week before and reentering a week after the budget announcement.

The median returns one week and one month before the budget day were -1.4 percent and -2.2 percent, respectively. However, investing on the day before the budget has a 54 percent probability of yielding negative returns after one month.

The report notes that market behavior one week before and one week after budget announcements are like a mirror image where investors tend to reduce their exposure due to uncertainty before the budget, resulting in negative returns 63 percent of the time. After the budget,they reenter the market, leading to positive returns 62 percent of the time.

For the purpose of this study, they analysed various budget years, announcements made and the impact on the market. For example, in 2003, the NDA government introduced new taxes to reduce the deficit. The CNX500 rose 0.5 percent on budget day but fell six percent a month later. A year later, it had doubled. Another example cited was in 2018, when Arun Jaitley reintroduced a 10 percent Long-Term Capital Gain Tax. The CNX500, the study noted, remained almost unchanged on budget day but dropped 4.6 percent a month later.

In a press note, Anoop Vijaykumar, Head of Research at Capitalmind, noted that one needs to focus on long-term fundamentals rather than short-term market movements driven by budget announcements. “While there tends to be significant volatility leading up to and immediately after the budget based on expectations, the longer term is driven by the underlying fundamentals of corporate earnings growth,” said Vijaykumar.

Long-term investors. he added, should avoid making significant equity allocation decisions based on budget expectations.

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