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Business News/ Markets / Stock Markets/  Which sectors may rally this budget? How markets trend in pre and post-budget, a look in past

Which sectors may rally this budget? How markets trend in pre and post-budget, a look in past

Past data of nearly a decade indicates that markets rally in anticipation of the budget but enter into a bearish tone after the announcement. Although, majority of the time, markets have reacted positively to pre and post-budget announcements.

Finance Minister Nirmala Sitharaman will announce Budget 2023 on February 1st this year. Premium
Finance Minister Nirmala Sitharaman will announce Budget 2023 on February 1st this year.

Union Budget 2023-24 is less than two weeks away and expectations are of a populist budget ahead of elections next year. This budget is expected to focus on long-term growth, continuing on the path of fiscal consolidation, further strengthening the financial system, and lowering the current account deficit. Stock market investors can expect some specific sectors such as infra, energy, and defence among others to be the theme for the budget.

However, past data of nearly a decade indicates that markets rally in anticipation of the budget but enter into a bearish tone after the announcement. Although, majority of the time, markets have reacted positively to pre and post-budget announcements. Will this trend continue even in Budget 2023? And which sectors are likely to benefit this time?

Explaining markets performance in prepare & post Budget trade in the last 5 or10 years, Divam Sharma, Founder at Green Portfolio a Sebi registered portfolio management service provider, said, "it has mostly been buy the rumour and sell the news for many sectors that get directly impacted like PSUs, PSBs and Railways players."

Sharma added, "We have seen several sectors rallying by double digits in anticipation of the budget. Looking past at the last 5 years, markets rally in anticipation of the budget and underperform for the next one month. We have observed this trend four times out of the last five years."

In the last five years, on average, Nifty 50 has yielded a negative 2.8% one-month return post the announcement.

Meanwhile, as per Sonam Srivastava, Founder at Wright Research, SEBI Registered Investment Advisor, the market has fallen five times, while gaining six times in the month ahead of the Union Budget in last 11 years and has oscillated between -3 and +3%. The budget day has been positive most of the times and the post budget has been more positive than negative.

So what can stock market investors expect from Budget 2023?

According to Sharma, this budget should be a populist budget with elections coming next year.

He said, "Last 4 years, we have not seen income tax slab sops for the masses, we can expect some sops this time Pre-Election year budget sops would also include spending for the rural economy, which has been facing stress over the last 1 year, populist welfare schemes, and spending on health infrastructure."

This time as well focus is expected to remain on growth. He added, "Manufacturing as a trend has been successful through various policies including PLI, this should see further expansion."

Also, Sharma said, "as we expect a CAPEX cycle over the coming years and as the Government wants to attract manufacturing CAPEX, Industrial parks, sops for manufacturers, spend on infrastructure building should be on radar. Renewables will be on radar, to reduce the cost of energy to GDP, ensuring energy security and reducing the import burden. This will be pushed through solar, public transport, EV related sops announcements."

Whereas, this year, Srivastava added, “we see a pre budget buying in stocks that might be favoured by the budget but on the broader market level, the volatility could persist. The announcements in the budget could be crucial - if the budget is too populist it might hurt sentiments while a more cautious budget might be more welcome."

Meanwhile, Anil Rego, founder, and fund manager at Right Horizons believes that the upcoming budget is the final budget before pre-elections in 2024, so the focus will be primarily on growth through improving infrastructure, manufacturing and exports, and tax benefits for investors and taxpayers.

Lastly, Sameer Kaul – MD & CEO of TrustPlutus said, "Market investors would hope for a progressive non-populist, capex-focused and fiscally prudent budget, which would be well accepted by market participants especially foreign investors. Hence, expectations are for a well thought out middle of the road approach towards balancing the books in FY’24."

Which sectors are expected to benefit the most from the budget 2023?

Market investors can expect the Government to support CAPEX, infrastructure creation, and import substitution to ensure a high GDP growth over the coming years, as per Green Portfolio founder.

In regards to energy and power sector, the world has seen the importance of energy security and keeping low energy costs as a percentage of GDP. Companies offering distribution, generation, equipments, and EPC-related services will benefit from developments in infrastructure. Also, allied sectors including EPC, Cement, and Steel will benefit considering the push for infrastructure creation by the Government.

Further, manufacturing (PLI) related sectors such as Textile, Pharma, Automobile, and Chemicals could benefit from a further thrust by the government.

Also, defence manufacturing sector will be on the radar. Sharma expects government to push local manufacturing and exports of Defence equipment's.

On the defence sector, Ashwin Patil, Senior Research Analyst at LKP Securities said, "Defence sector, as every year before the budget has a wishlist out of which the important one is outlay for emphasis on indigenisation, which means emphasis on local production. The GOI definitely does a lot for the sector every year, also on the R&D side where they plan to spend a substantial amount. Therefore even this year we expect them to announce a significant budget for the space and research, electronic equipments, and advancement on further localization."

Adding Patil said, "on PLI schemes, we would say that the GOI is fostering healthy competition in the defence space through launching various PLI schemes. This would surely improve the quality of defence products and services and further enhance the defence sector. Also, the country needs to improve on their space research, due to which we believe that further PLI schemes will be more focused on Space research."

Furthermore, Sharma has also factored further push for the Banking sector through efforts towards financial inclusion, rupee-denominated trades, and focus on tech implementation. Notably, the government is already working on a single tech application for all PSBs for lending.

Hence, as per Green Portfolio's founder, energy, defence and infrastructure will be the theme for the budget as the focus will be on long-term growth, financial strength, and reducing current account deficit relative to GDP.

Realty sector may also witness a boost. According to Rego, there is an expectation for the Government to increase tax slabs from the existing levels. If that happens, it will leave more disposable income in the hands of consumers, which will boost the growth of the economy. Also, there is an expectation of additional incentives to increase affordable housing. Currently, homebuyers can claim a deduction of up to 2 lakhs on the annual interest paid on a housing loan. In the upcoming union budget, home buyers expect this limit to be increased up to five lakhs.

In Srivastava's view, the focus will also be to improve ease of doing business. The Budget is expected to continue the focus on domestic manufacturing revival and PLI schemes for labour-intensive sectors are likely. Most importantly instead of going populist the Budget expected to continue to focus on post-Covid fiscal consolidation and focus on divestment and reduction of subsidies.

In regards to the tax structure for capital gains is expected to be discussed in the upcoming union budget. Rego said, "this might help Indian taxpayers to have more disposable income in hand, which can be mobilised into investments and utilised efficiently."

Rego also highlighted expectations of tax exemption on the interest paid on personal loans and education loans which account for a large share of the credit basket. Burdened by inflation and increasing rates this relief will nurture credit growth and spending. Food and fertiliser subsidies account for about one-eighth of India's total budget spending of 39.45 trillion rupees this year, and to control the fiscal deficit that inflated during the pandemic the government might look to cut down. The Society of Manufacturers of Electric Vehicles is seeking an extension of EV subsidies under the FAME-II scheme and the inclusion of light to heavy commercial vehicles to promote electric mobility.

Will the same sectors rally in Budget 2023 like the previous one?

Last budget, sectors like banks, capital goods, FMCG, pharmaceuticals, IT, real estate, and metals did well.

This Budget 2023, Sharma expects banks, capital goods, and Pharma to rally post the budget announcement. Some favourable benefits will accrue to real estate if tax deduction benefits can be announced. Metals infra and energy-related stocks could rally not because of the announcement particularly, but owing to the Chinese reopening and factors influencing the global economy.

However, Green Portfolio does not expect the IT sector to rally.

Finance Minister Nirmala Sitharaman will announce Budget 2023 on February 1st this year. From the previous Budget to date, Sensex and Nifty 50 have gained between 2.5-3%.


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 17 Jan 2023, 01:36 PM IST
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