How costly are the markets going into the interim Budget 2024?

Post-budget valuation

Highlights

• Post budget, one-month movement of the markets insignificant, barring a few years
• Budget’s impact on stock movements lasts for a few trading sessions
• Budget’s impact on earnings is what matters to the markets
• History suggests markets delivering negative one-month return at heady valuations
• The current valuation is reasonable and at a slight discount to long-term average
• India is a structural growth story, so any correction would be bought into

While prima facie it is a very fair question, our analysis of the past ten years’ budgets of the NDA government suggests that market movement after a month of the budget had not been significant, barring a few years. Hence, investors should not pay much heed to the budget day market movements.

Source: Moneycontrol Research

India is now a multi-year growth opportunity and the reforms process is a steady exercise and not a one-off issue. Hence, investors usually get over the budget’s impact in a few trading sessions.

However, what matters for the markets in the medium to long term is the earnings trajectory. To that extent, any budgetary announcement that can lead to meaningful earnings revision will merit attention. Also, the valuation of the markets has a bearing on the post-budget movement.

Source: Moneycontrol Research

Our analysis suggests that whenever the one-year forward Price Earnings of the Nifty is above 21x,  markets have delivered a one-month negative return post the budget.

Seen in this context, the current valuation at 19.1x one-year is not only reasonable but at a discount to the ten-year average of 19.5x. Hence, going by historical trends, we do not foresee a negative one-month return.

We believe India’s current strengths — the transition to sustainable energy, the trillion-dollar manufacturing exports opportunity, its unique advantage to become a global service hub, the great infrastructure build-up along with the evergreen consumption opportunity — are mega trends for investors to ride on for many more years.

The earnings growth story in India is trending higher in a structural manner, supported by favourable demographics, improved labour productivity, and a multipolar world that will drive up services exports and FDI. The formalisation of the economy is getting reflected in the earnings growth of Corporate India. We have reasons to believe that beyond the earnings growth, there are several structural changes, including reduced reliance on volatile foreign flows, the coming of age of Indian retail investors, and a rising share of stable domestic liquidity, which will keep inflows into equities elevated for many more years.

Hence, any weakness in this market will be short-lived and bought into for the long term.

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