The country's Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget for the financial year 2021-22 on 1 February 2021.
Ahead of the presentation, markets have scaled new highs. Sensex is currently above the 49,000 mark and Nifty closed near 14,500 this week.
The MarketCap-to-GDP indicator is at a decade high. India's market capitalisation-to-GDP ratio has been volatile as it moved from 79% in FY19 to 56% (FY20 GDP) in March 2020 and now stands at 98% (FY21E GDP) - above its long-term average of 75% and highest since FY10, according to a Motilal Oswal report.
In 2020, ahead of the budget, both the benchmark indices of the Indian stock exchange- Sensex and Nifty 50 - had touched their respective highs and collapsed after the presentation of the Union Budget. Another major fall in the market was seen after the nationwide lockdown announced to curb the spread of COVID-19.
As we await the Budget presentation, investors wonder if markets fall after the Budget like it did in 2020? Should you book profits? or is it too late to enter the market now? Will the rally continue?
What's driving January's rally?
- The Q3 results season has begun and most firms are expected to report better results than their previous quarters. Certain sectors like IT have rallied in anticipation of good results and higher revenue guidance.
- Foreign investors have been pouring money into Indian equities since November 2020. The over Rs 1 lakh crore flow into the market has pushed indices to new records. As per a Motilal Oswal report, FII (foreign institutional investor) inflows for the calendar year 2020 were strong at $23.4 billion, the highest since 2012.
- Improved macro factors like inflation levels (CPI or retail inflation reported at 4.59% in December) have raised hope for faster recovery from the economic damage caused by the pandemic.
- Vaccine roll-out in India as well as abroad has also improved the outlook of the economy.
- Global stock markets also hit record highs earlier this week as investors awaited details on the US stimulus.
Factors that could affect post-budget market sessions
FM Sitharaman has a challenging task at hand this year- presenting a post-GDP-contraction budget, wherein the objectives will range from boosting economic growth to creating employment while keeping a check on the fiscal deficit.
Announcements not in favour of equity investments could hurt market sentiment. For example, in July 2019, an increase in the income-tax surcharge for those with over Rs 2 crore income spooked the markets. While the higher surcharge was aimed at the ultra-rich, it spooked foreign portfolio investors (FPIs), especially those with non-corporate structures, causing them to pull out Rs 6,000 crore in 13 trading sessions following the Budget.
Therefore, the risk of withdrawal of foreign investment could cause some correction in the stock market, however, it is unlikely that a correction as sharp as that in March 2020 will repeat this year.
On the other hand, FM Sitharaman has said that this year's budget will be "unlike anything in the past 100 years" causing anticipation of big announcements to support growth, which will be in favour of the market.
Like always, predicting the movement in the market is impossible.
Where should you invest ahead of the Budget 2021 presentation?
Amid December quarter earnings, Union Budget expectations and cues from the developed economy markets, the benchmark indices have been volatile this week.
An analyst at Kotak Securities quoted in a Financial Express report said that a correction in the Indian share market cannot be ruled out if Nifty and Sensex trade below 14,435 and 49,100, respectively. In that case, long term investors can look for opportunities to buy on correction.
Meanwhile, independent analyst Baliga told Business Standard that valuations are too expensive at the moment and that we may be in the bubble-zone. He goes on to advise investors to book profits and sit on cash as the current rally is being driven by liquidity and sentiments which appears to be disconnected from the reality.
Further, an analyst from HDFC Securities said that the current volatility may be used to review one's asset allocation. For those invested heavily in equity can look at booking some profits to invest in bonds or gold if underinvested in these asset classes, for some time, and buy back into stocks after equity markets correct reasonably.
As for those looking for sectors to invest in anticipation of Budget announcements, an increased allocation is expected for the health sector, education sector, infrastructure, affordable housing, defence sectors. As for other picks for long-term investors, after the vaccination roll-out, hospitality and tourism-related stocks look attractively valued at the moment and could surge in 2021 in anticipation of a pick-up in pent-up demand among people working-from-home for close to a year.