St has legs for a pre-budget run?

Call it the nervous fortnight if you will. The 15-day period preceding the annual budget is typically action-packed, with the market trending up or down significantly, depending on the outcome being anticipated.

A DNA analysis shows that the BSE Sensex saw 5%-plus moves over the 15-day period preceding the Budget in as many as six of the last 10 years. Only once did it move less than 1%.

Will it be any different this year? The next few weeks will tell us for sure. But the upcoming Budget, billed the biggest-ever, could well make or break the market’s course.

In fact, the Sensex has reversed direction in the pre-Budget fortnight on five of last ten occasions.

In 2008, for example, the Sensex rallied 5% from 16949 to 17284 in the 15 days leading up to P Chidambaram’s “farmer friendly” Budget. This was a U-turn from the preceding 15 days, which had seen the index shed 6.6% from 18152.

History could well repeat itself.
Indian stocks have gained 4.18% in the past 15 days, riding on foreign capital inflows.

In the past 13 weeks, emerging markets have received capital flows in excess of $26 billion, with India alone cornering $6 billion. At this rate, liquidity would touch record levels in double quick time.

To offer some perspective, emerging markets had received around $40 billion during the whole of 2007, the best year so far.

Some experts feel a major trend reversal is unlikely as long as foreign capital flows continue, notwithstanding the significant run-up in stocks.

Others, however, feel this gives reason to suppose a U-turn is nigh.
Sandip Sabharwal, CEO-PMS, Prabhudas Lilladher, says the market is due for a correction. “Markets have had a strong run. I think now they will enter a corrective phase. There is complacency, and everyone’s expecting the market to be strong till the Budget. But I feel a correction will happen before Budget. Globally also, fatigue is setting in. I expect a 15% correction, though all of it may not happen before the budget.”

Gopal Agrawal, head-equities, Mirae Asset, agrees that liquidity will continue to play a crucial role. “But some risks are emerging. The yield on US 10-year government securities has crossed 4%. Ideally, the nominal GDP growth rate should be higher than long-term interest rates. But even if we assume the US GDP grows 2% and inflation around 1%, you still fall short. That means your ability to repay the principal is at risk. Somewhere, it should give,” he says.

The volatility over the past few sessions is a cause for concern.
“Though the index has remained flat, already some of the sideline stocks are getting butchered. We are trying to move into stocks with relatively low valuations,” says Agrawal.

Sabharwal feels the fall will be more because of the recent run-up. “There is not much scope for disappointment for the market in the Budget itself. The correction itself will happen because we have run up too fast. Stocks went up globally and we went up faster. Now, with things slowing down globally, we are likely to join.”

Some experts, however, would like to brush side these concerns as “short term,” Ridham Desai, managing director, Morgan Stanley, for one. “Medium term things will be good. Until elections, we were expecting corporate earnings to fall. We now feel earnings may actually rise. Higher corporate earnings mean market could go higher. It could go higher than where we are now.”

Desai, in fact, has his eyes set on the 19000 mark, assuming the government undertakes reforms and the world markets remain stable. “That’s a bull-case scenario. It looks like Indian equities outperform the rest of the world. The absolute performance will hinge on partly what the world does and what New Delhi does,” he says.