 "Budget 2017: Here's how to make the most of market volatility")
There are two ways to make money in the stock market. Either one rides the growth wave, buy and hold stocks that offer rising earnings and stock prices or play the market volatility — buy a stock when it is rising and sell if it’s falling. The latter, also called momentum trading, can be profitable during periods of heavy news flow, such as before or after the Union Budget.
The run-up to the Budget is full of market-moving news about various sectors and companies, which translates into volatility, providing ample trading opportunities. After the Budget, the focus is on unpacking the financial impact of the finance minister’s proposals on key sectors and companies. Though the market tends to price in the impact of measures on the Budget day itself, traders can still make money by exploiting the gap between the market’s immediate reaction and the long-term impact of the Budget measures.
Historical data suggests that more often than not, the broader market corrects in the run-up to the Budget. For example, the Sensex fell by an average of 4.4 per cent during the 30-day period prior to the Budget. The pre-Budget trade has been a one-way bet, with the index correcting on all past 10 occasions (see table).
This year, however, has been different. There has been a strong pre-Budget rally, giving profitable opportunity to short-term investors. The Sensex is up six per cent in January so far. This opens the possibility of a post-Budget correction if the finance minister’s proposals fall short of expectations by even a small margin, given the historical trend.
However, pre-Budget volatility always provides some sure trading opportunities. “Railway and fertiliser stocks have always given returns to short-term investors in the past, as bulls bet on them due to budgetary allocations announced for the two sectors almost every Budget,” says Baliga. Not surprisingly, railway equipment manufacturers such as Titagarh Wagons and Texmaco Rail top the pre-Budget volatility chart in BSE 500 companies. Likewise, infrastructure developers, engineering and construction companies, especially those related to irrigation and highways, also provide good trading opportunities for short-term investors.
Among BSE-100 stocks, Adani Ports and GMR Infra have always been among the most volatile, providing trading opportunity to short-term investors.
Experts say, this year the focus has been on stocks related to the rural and affordable housing sectors in the pre-Budget rally. “With the imperatives of neutralising the economic impact of demonetisation and impending state elections, the government is likely to adopt populist measures focusing towards the agriculture and rural sector. We expect expenditure to be concentrated on agriculture, food subsidy and the rural employment guarantee scheme,” says Dhananjay Sinha, head of institutional equity, Emkay Global.
This is likely to provide a leg-up to consumer and rural market-focused firms such as ITC, Hero MotoCorp, Britannia, Coromandel International and Maruti. Focus on health care could mean some push to players like Cipla, where domestic sales contribute a higher share to revenues.
Here are 10 select stocks that have seen increased volatility around the Budget in the past five years. But, a word of caution for investors. Some experts dismiss the entire notion of Budget trade. “At best, the Budget has some impact on the sentiment in the short term but has little or no impact on the fundamentals of a stock. Many short-term traders play the Budget volatility but it’s too risky for individuals, given the potential losses if the call goes wrong,” says G Chokkalingam, chief executive of Equinomics Research & Advisory Services.
Contributions from Ram Prasad Sahu, Hamsini Karthik, Sheetal Agarwal & Ujjval Jauhari
Impact of Budget on key stocks
DLF: The DLF stock has been a gainer on the back of sops given to the affordable housing segment. Last year, the government had proposed a 100 per cent deduction to firms for construction under affordable housing. Read more
ADANI PORTS: Every year, the extension of tax sops for Special Economic Zones (SEZs) and its infrastructure business has kept Adani Ports’ stock busy prior to the Budget day. Read more
ASHOK LEYLAND: Moves to boost development of public transport under the smart cities plan, higher allocation to defence space and expectations of tax breaks on research and development (R&D) to promote fuel-efficient and environment-friendly vehicles in the previous Budgets have kept interest on the stock high. Read more
ITC: Heightened noise around the possibility of higher excise duties on cigarettes has lent more volatility to the scrip over the past few years, especially around the Budget. Read more
M&M FINANCE: The Budget usually has some goodies for the rural population through direct transfers or otherwise. Either way, it is good for companies such as Mahindra & Mahindra Financial, which draws 60 per cent of its revenue from rural India. Read more
SIEMENS: Given its focus on the power sector, expectations of a likely Budget push towards renewable energy or even conventional power plants have helped the Siemens stock price gain ahead of the Budget session. Read more
BHARAT HEAVY ELECTRICALS: With project execution and order flows for BHEL under pressure, expectations remained high last year. They are still high for the power sector, keeping traders excited. Read more
CIPLA: Stocks of pharmaceutical companies are largely less volatile around the Budget but Cipla, having more domestic exposure, has seen volatility. Read more
GMR INFRASTRUCTURE: With interest in roads, airports and power, Street expectations are typically higher for GMR, leading to pre- and post-Budget volatility in the stock. Read more
IDBI BANK: Planned outlay towards recapitalisation of public sector banks (PSBs) is one key factor impacting IDBI Bank and its peers around the Budget. Read more
The run-up to the Budget is full of market-moving news about various sectors and companies, which translates into volatility, providing ample trading opportunities. After the Budget, the focus is on unpacking the financial impact of the finance minister’s proposals on key sectors and companies. Though the market tends to price in the impact of measures on the Budget day itself, traders can still make money by exploiting the gap between the market’s immediate reaction and the long-term impact of the Budget measures.
Historical data suggests that more often than not, the broader market corrects in the run-up to the Budget. For example, the Sensex fell by an average of 4.4 per cent during the 30-day period prior to the Budget. The pre-Budget trade has been a one-way bet, with the index correcting on all past 10 occasions (see table).
This year, however, has been different. There has been a strong pre-Budget rally, giving profitable opportunity to short-term investors. The Sensex is up six per cent in January so far. This opens the possibility of a post-Budget correction if the finance minister’s proposals fall short of expectations by even a small margin, given the historical trend.
However, pre-Budget volatility always provides some sure trading opportunities. “Railway and fertiliser stocks have always given returns to short-term investors in the past, as bulls bet on them due to budgetary allocations announced for the two sectors almost every Budget,” says Baliga. Not surprisingly, railway equipment manufacturers such as Titagarh Wagons and Texmaco Rail top the pre-Budget volatility chart in BSE 500 companies. Likewise, infrastructure developers, engineering and construction companies, especially those related to irrigation and highways, also provide good trading opportunities for short-term investors.
Among BSE-100 stocks, Adani Ports and GMR Infra have always been among the most volatile, providing trading opportunity to short-term investors.
Experts say, this year the focus has been on stocks related to the rural and affordable housing sectors in the pre-Budget rally. “With the imperatives of neutralising the economic impact of demonetisation and impending state elections, the government is likely to adopt populist measures focusing towards the agriculture and rural sector. We expect expenditure to be concentrated on agriculture, food subsidy and the rural employment guarantee scheme,” says Dhananjay Sinha, head of institutional equity, Emkay Global.
This is likely to provide a leg-up to consumer and rural market-focused firms such as ITC, Hero MotoCorp, Britannia, Coromandel International and Maruti. Focus on health care could mean some push to players like Cipla, where domestic sales contribute a higher share to revenues.
Here are 10 select stocks that have seen increased volatility around the Budget in the past five years. But, a word of caution for investors. Some experts dismiss the entire notion of Budget trade. “At best, the Budget has some impact on the sentiment in the short term but has little or no impact on the fundamentals of a stock. Many short-term traders play the Budget volatility but it’s too risky for individuals, given the potential losses if the call goes wrong,” says G Chokkalingam, chief executive of Equinomics Research & Advisory Services.
Contributions from Ram Prasad Sahu, Hamsini Karthik, Sheetal Agarwal & Ujjval Jauhari
Impact of Budget on key stocks
DLF: The DLF stock has been a gainer on the back of sops given to the affordable housing segment. Last year, the government had proposed a 100 per cent deduction to firms for construction under affordable housing. Read more
ADANI PORTS: Every year, the extension of tax sops for Special Economic Zones (SEZs) and its infrastructure business has kept Adani Ports’ stock busy prior to the Budget day. Read more
ASHOK LEYLAND: Moves to boost development of public transport under the smart cities plan, higher allocation to defence space and expectations of tax breaks on research and development (R&D) to promote fuel-efficient and environment-friendly vehicles in the previous Budgets have kept interest on the stock high. Read more
ITC: Heightened noise around the possibility of higher excise duties on cigarettes has lent more volatility to the scrip over the past few years, especially around the Budget. Read more
M&M FINANCE: The Budget usually has some goodies for the rural population through direct transfers or otherwise. Either way, it is good for companies such as Mahindra & Mahindra Financial, which draws 60 per cent of its revenue from rural India. Read more
SIEMENS: Given its focus on the power sector, expectations of a likely Budget push towards renewable energy or even conventional power plants have helped the Siemens stock price gain ahead of the Budget session. Read more
BHARAT HEAVY ELECTRICALS: With project execution and order flows for BHEL under pressure, expectations remained high last year. They are still high for the power sector, keeping traders excited. Read more
CIPLA: Stocks of pharmaceutical companies are largely less volatile around the Budget but Cipla, having more domestic exposure, has seen volatility. Read more
GMR INFRASTRUCTURE: With interest in roads, airports and power, Street expectations are typically higher for GMR, leading to pre- and post-Budget volatility in the stock. Read more
IDBI BANK: Planned outlay towards recapitalisation of public sector banks (PSBs) is one key factor impacting IDBI Bank and its peers around the Budget. Read more