Markets: The cat is out of the bag... - Views on News from Equitymaster

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Markets: The cat is out of the bag...

Mar 1, 2006

The much-awaited event of the year got over yesterday, as the FM 'performed his rituals' and announced a rather bland Union Budget for 2006-07. Although, there were no major reforms introduced on the tax front, which were largely kept unchanged, there was only some tweaking done resulting in no major surprises. This was unlike last year wherein the implications (of issues like FBT) were understood much later. During the day, like every year the indices showed immense volatility but finally ended in the positive. We had recently conducted a poll on our website asking people if they were waiting for the budget to make their investment decisions and the results were quite skewed. Around 62% voted that they were waiting for the budget and 32% indicated not doing so.

Sensex as on
  12th Feb 28th Feb Change 1st March 15th March Change
2000 5,924 5,741 -3.1% 5,642 5,250 -7.0%
2001 4,406 4,247 -3.6% 4,272 3,820 -10.6%
2002 3,498 3,562 1.8% 3,679 3,618 -1.7%
2003 3,248 3,284 1.1% 3,277 3,108 -5.2%
2004 5,937 5,668 -4.5% 5,742 5,521 -3.9%
2005 6,679 6,714 0.5% 6,651 6,752 1.5%
2006 10,173 10,370 1.9% - - -

As can be seen from the above table, the past trend indicates that post the budget, in five out of the six years under review, the indices have corrected and in some cases, the correction was quite sharp. It must be noted here that history has a habit of repeating itself and hence considering the recent run up of the indices, in our view, 2006 might be no different and thus not be spared.

Also, what seems apparent is the fact that investors seem to have already factored in the little positives of the budget. Investors were looking for more concrete measures that would boosts investments in the country, which did come through in the budget announcements. For once the markets seemed to have been factoring in more of long-term fundamentals than just short-term stopgap measures. Although, growth in some sectors like infrastructure and engineering is visible due to the projects initiated by the Central government, other sectors like cement and steel shall also benefit indirectly.

The post-budget equity strategy
While the short-term traders may not be happy about the 25% increase in STT (securities transaction tax), for a long-term investor i.e., one with a three to five year view, nothing has changed. Equities still remain a high-risk asset class and rewarding in the long-term. Provided there is a decent stock selection process and more importantly, there are promising long-term stories available at reasonable valuations even in this market. Buy those stocks and hold for the long-term and you do not have to worry about yearly budget announcements.

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