Sensex and Budget 2023: Ridham Desai will keep an eye on these 3 things

 

• Budget 2023: Factors likely to have maximum impact include a credible fiscal deficit target, government's spending plan vs fiscal consolidation, and changes in long-term capital gains tax, said Ridham Desai

The budget's impact on markets has been on a secular decline, though the actual performance is a function of pre-budget expectations, said Ridham Desai of Morgan Stanley in a note on expectations from the Union Budget 2023, which will be presented by the finance minister. Nirmala Sitharaman 1 February.

"Market participants still need to negotiate volatility. Factors potentially having the maximum impact include a credible fiscal deficit target, fiscal consolidation versus the government's spending plan, and changes to the long-term capital gains tax," Desai said. Told.

Equity Strategy - Three Things to Look for

History suggests that the impact of the Union Budget on short-term market performance is diminishing. That said, volatility has increased since 2019 and is set to reach an eleven-year high in 2022. Expectations (as measured by pre-budget equity market performance) are important in determining what the market does immediately after the budget, highlighted Ridham Desai.

In the 30 days after the budget, the market falls on two out of three occasions. The probability of such a decline increases to 80% if the market has rallied in the 30 days before the Budget. “Only twice in 30 years has the market been up both before and after the Budget. This year, so far in January, India is tracking lower on an absolute basis and a relative basis and if this trend persists till Budget day, the possibilities increase for a positive surprise," the note said.

• Tax buoyancy gives the government an opportunity to increase spending and/or strengthen its fiscal position. If governments focus on fiscal consolidation, we expect the financials to perform better. If it prioritizes spending (especially rural and infrastructure spending), consumer discretionary and industrial stocks will outperform. All three of us are overweight.

• The prospect of a credible fiscal target with its concomitant impact on macro stability will be cheered by stock markets and also give the RBI more flexibility in exiting the rate upward cycle.

• Increase in effective long-term capital gains tax on equity (either by increasing the holding period from 12 months to 2 or 3 years to qualify for long-term capital, or by increasing the tax rate from 10% to 15%) ) could be a washout for stocks, especially in the broader market.

“Volatility is a greater certainty than performance. While post-Budget performance is difficult to predict, one thing that seems more certain is that volatility will be higher on Budget day, even though volatility has been declining over the past three decades. Yes," said Desai.