Also See |Run-up to Budget 2010

That seems to indicate, at first glance, that the Union Budget has indeed weighed on the market. But it’s not as cut-and-dried as it looks. If we take the rebound in the market from its March lows last year, the Sensex has gained by 99%. That’s higher than all its peers, except for Vietnam’s Ho Chi Minh index, which is up 106%. Brazil’s Bovespa index, which has gained 3.36% this month, is up 84% from its March lows. The Hang Seng is up 80%. In short, it may also be the case that the Sensex is underperforming, not because of the Budget, but simply because it had gone up a lot and valuations had become stretched and investors have booked some profits. According to data from Kotak Institutional Equities, the price-earnings multiple for the Sensex on the basis of FY2011 earnings is 12.8, compared to 10.4 for the Bovespa, 11.8 for Hong Kong and 8.4 for Korea.

A look at the sector indices shows that the BSE Realty index has been the worst performer this month, down 9.9%. But that could be on the back of the widely anticipated monetary tightening. The capital goods index is up 0.73%, perhaps on the hope that infrastructure will continue to get a boost in the Budget. But the star performer this month has been the BSE IT index, which has gained 4.5%. Since the IT sector is a play on the US recovery and the expectation is that the tax holiday will be extended, it has done well. But the auto sector, which is almost certain to see higher excise duties, is up 1.2% this month.

It’s true, of course, that the markets have been driven by flight from risk this month. What has mattered most has been a withdrawal of funds from all emerging markets, with the most expensive markets being hit the worst. But as Ajit Surana, managing director, Dimensional Securities, emphasises, the very fact that the markets have not gone up before the Budget is an indication that markets are worried about it. If the finance minister chooses not to unpleasantly surprise the markets, that could therefore lead to a relief rally. But whether it will last will depend completely on global liquidity.

Write to us at marktomarket@livemint.com

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