Budget don't affect all sectors

Budget announcements don’t affect all sectors or companies uniformly. While some tax proposals improve market sentiment with regard to certain sectors, others have a negative influence on some other sectors.

A case in point is the excise duty hike on cement and withdrawal of indirect tax exemption available to construction companies with retrospective effect announced last year.

The market reacted swiftly, pulling down the stock price of most of the stocks in the two sectors. The ET Cement index fell by 6% on budget day, while ET Construction index shed 8%.

The pessimism in the two sectors continued for over a month. However, by the end of ’07, most of the stocks in the two sectors reached new highs. Is it a coincidence or is this a regular feature in the budget month?

To find out, we studied the movements of ET sectoral indices on budget day and during the following weeks, for five years since ’03. Additionally, we compared the Sensex returns in February and March for every year since 1991.

The results were startling. We found that every budget leads to a fall on the budget day (and the following weeks) in some or other sectors. And this provides a buying opportunity for investors, since the fall is a temporary phenomenon.

In ’07, for instance, the ET Construction index more than doubled from its closing value on budget day. In ’03, shipping, textile and sugar indices witnessed a similar trend. These three indices fell the most on budget day and ended March with a negative return of 10%. In the next 12 months, however, their value nearly tripled.

The Sensex exhibits similar gyrations during and after the budget. In 13 of the past 17 years since 1991, the benchmark index has fallen in the month of March. But the post-budget blues are almost often preceded by a mini rally in February.

Hence, the decline in stock prices due to the budget has no relation with the expected future returns in the following months. Instead, investors can use this as a buying opportunity.

As the fall continues for at least two weeks after the budget, investors need not rush to buy the stock on the budget day. They will be better off if they accumulate their favourite stocks over a period of time and thus, lower the average investment cost.

For example, in ’04, the ET Consumer Durable index fell over 2.5% in the week following the budget day. Subsequently, it declined by another 9% in the next week and finally ended the month with a negative return of 14.5%.

But here’s a word of caution for investors. Do not buy a stock only because it fell on the budget day. Instead, buy those stocks that are growing and are expected to grow even after the budget.What matters in the medium and long term is the demand for goods and services offered by the company. In a growing economy, the company can easily pass on tax increases to its customers.