Taking stock of the Budget

How will Budget 2018 impact the stock market? Traders and investors share their expectations



If you are an avid follower of the Indian stock market, you will probably agree that the Union Budget provides some short to medium direction to the equity market. The Budget has set even long-term trends for the markets. BusinessLine spoke to traders to find out how they are gearing up for the big event.

Trade strategy

In the Union Budget 2016, there was an increase in Securities Transaction Tax (STT) on options trading from 0.017 per cent to 0.05 per cent, which caused some short-term trigger to the stock markets. Moreover, this was to discourage more speculation in the options market.

Manish Kumar, an active swing trader with Epic Research, says, “I am not focused on anticipating the Budget rally. I am focused more on those stock movements that can be captured in a short time horizon with more planning and proper risk management, irrespective of the Budget outcome.”

An increase in income tax slab and tax exemptions for long-term capital gains are on his wish-list.

Musaveer Sait, a full-time trader and investor, also anticipates the same. “I hope the government considers increasing the savings limit under 80C,” says Musaveer.

Such a move in this Budget can trigger a sharp rally in the benchmark indices on Budget day. Musaveer always sets up market-neutral strategies to trade the volatility on Budget day.

“The Budget is a big event and can influence the movement in multiple stocks. I make it a point not to trade individual stocks but rather prefer trading the Nifty and Bank Nifty indices by setting up a short straddles and strangles strategy,” says Musaveer.

He has been trading using these strategies for the last three years.

“I have observed that the volatility drives as and when we approach events such as Budgets. So I try and exploit it by writing options.

Volatility drops post-event and therefore the premiums. This has worked reasonably well across events, including the Budget. So in a sense, these trades are set up before the event and closed post the event,” adds Musaveer

Consumption

Consumption as a great theme began in the 2016 Budget, as the government proposed to spend more on infrastructure, agriculture and rural development. The implementation of the Pay Commission payouts lent support to consumption.

Further in the year 2017, the rural sector allocation was increased by 23 per cent and that kept driving the consumption theme. FMCG stocks such as HUL, Marico and Dabur have given excellent returns to investors over the last one year.

So keeping an eye on the sector allocations in the Budget is also one of the strategies that traders follow.

Ragavendran M, a long-term investor, had greater allocation in his portfolio to logistics and FMCG sectors prior to Budget 2017.

He shifted his focus towards the automobile and power sectors after Budget 2017. He expects that the agriculture and pharmaceutical sectors may get a boost from this year’s Budget and these sectors could be a good bet, going forward, in 2018.

Abdul Wahid, basically an intra-day trader with a half-decade of trading experience, says, “Pre and post Budget, my returns on capital are fairly good. Market has given one-sided move and my long trades did much better than any short-term counter move. It has been above 24 per cent overall.”

An increase or decrease in excise duty has a major impact on the sectors and stocks as well.

For instance, the double-digit increase in excise duty on cigarette had an adverse impact on the cigarette manufacturing companies, markedly on the stock of ITC on the Budget day of 2016. However, the stock began to trend upwards thereafter.

The excise duty increase in Budget 2017 had a positive impact on the stock as the company passed on the increase to costumers. This stock could be in focus again in Budget 2018 as well.

With Budget 2018 round the corner, investors as well as traders should look for the Budget wish-list in the sectors and bet accordingly.

After the announcement of the Budget, investors could decode it and consider betting depending on the government spending and allocations.

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