Investors are concerned about a surge in cases of COVID-19’s Omicron variant and the possibility of an interest rate increase as early as March by the US Federal Reserve – factors that could determine which way the markets move in the remainder of January.
Every year, the Union Budget is an event keenly awaited by investors and equity markets.
In recent years, it has turned out to be a bit of a non-event given the raft of pre-Budget policy announcements made by the government. Even so, every segment of the economy looks forward to the Budget’s unveiling with a mix of expectation and trepidation.
Data shows that in six of the last 10 years, sellers had the upper hand on Dalal Street in the month ahead of the presentation of the Budget.
The BSE Sensex corrected sharply by 7.5 percent in 2016 in the one-month run-up. The benchmark had fallen 6.2 percent in 2013. It dropped 3.8 percent each in 2012 and 2020; it was down 0.8 percent in 2014 and 0.7 percent in 2015.
It performed strongly in the month before the Union Budget was presented in 2017 and 2018, gaining 5.7 percent and 6.2 percent, respectively, followed by a rise of 1.5 percent in 2021 and 0.6 percent in 2019.
Will the bears dominate or bulls take charge in the month prior to Budget 2022?
Experts are largely betting on a positive trend, but they expect volatility amid uncertainty created by Omicron, the latest COVID-19 variant that has caused a surge in cases of the coronavirus disease globally, including in India.
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US interest rates
Another concern is the possibility of an interest rate hike as early as in March by the US Federal Reserve.
“The market is currently driven by global sentiment on expectations of an interest rate hike. The minutes of Federal Bank December policy meeting indicates a rise as soon as March 2022. There will be further uncertainty around the Omicron spread and the severity for the next 3-4 weeks,” said Divam Sharma, co-founder of portfolio management service Green Portfolio.
“We expect flat to negative sentiments in the market around the budget as we are currently driven more by the global and macro cues,” Sharma said.
The Budget will be presented by the Finance Minister on February 1. In the last four days since the start of January, the market has gained more than 2 percent, partly supported by a change in mood among foreign institutional investors (FIIs).
FIIs have turned net buyers since the start of the year, buying more than Rs 3,000 crore worth of shares so far, after largely consistent selling in the previous two months. They had net sold Rs 75,000 crore of shares in November-December.
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A pointer to government intent
Ashish Sarangi of Pickright Technologies Pvt. Ltd and Abhay Agarwal of Piper Serica Advisors Pvt. Ltd disagree with Divam.
The mood on Dalal Street turned upbeat on December 20, and that is expected to prevail in the rest of January if the uncertainty over Omicron reduces as Budget 2022 nears, Sarangi and Agarwal said.
“Over the years, the importance of the budget has reduced for investors since the government now does fiscal policy and tax rate adjustments throughout the year rather than waiting for Budget day. At the same time, budget is seen as a big indicator for the intent of the government towards fiscal discipline and economic growth,” said Agarwal, founder of Piper Serica.
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COVID worries
With a sharp increase in COVID cases and government securities yields, Agarwal believes investors will focus on these two points over the next month than the Budget itself.
“If the cases peak out by mid-January and interest rates stabilize we would like to bet that the market will stay in positive territory before the Budget.”
India reported 1,17,100 new cases in the 24 hours ending 8 am on January 7, the highest single-day addition since June 2021. There has been a significant increase in cases in the past one week, which has made the Sreet cautious, although there had been a more than 9 percent rally in the equity markets from December 21 before a sharp correction on January 6.
“With the government predicting a strong budget, we believe the market will continue upbeat for the rest of the month, attempting to reach the near-term high of 18,600 levels. Apart from IT, the market will be driven by good sentiment in the banking and infrastructure sectors this month. However, the day of the budget will determine the path forward,” said Ashish Sarangi.
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Reference Link:- https://www.moneycontrol.com/news/business/markets/bears-dominated-the-street-in-the-month-ahead-of-budget-in-6-of-last-10-years-will-they-prevail-again-this-time-7907611.html