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For Indian equity investors with a sense of history, now looks like a good time to cash out on some of their $112 billion in gains this year. As the Bloomberg chart shows, rising share prices in Asia's fourth-biggest market in the run-up to government budget announcements tend to be followed by losses after the numbers are revealed.
In the 11 occasions the benchmark S&P BSE Sensex rallied before budget day since 1995, it dropped an average one per cent in the following month, posting losses seven of those times. Finance Minister Arun Jaitley will present this year's budget on Saturday, with local equity markets open for a special trading session.
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Speculation that Prime Minister Narendra Modi's policies will boost economic growth has propelled the Sensex to the world's third-biggest gain among major markets during the past 12 months. Investors will be looking for details on Modi's plans to boost local manufacturing and cut subsidies to free up funds for roads, ports and power plants.
"Indian stocks have run up quite a lot before the budget on high expectations," said Hugh Young, the Singapore-based Asia managing director at Aberdeen Asset Management, whose $9.5 billion Aberdeen Emerging Markets fund has beaten 93 per cent of peers tracked by Bloomberg in the past five years. "This makes equities prone to disappointment if some hopes don't materialize."
The Sensex trades at 16.2 times estimated earnings for the next 12 months, a 13 per cent premium to the five-year average, data compiled by Bloomberg show.
Foreigners have bought a net $3.5 billion of Indian shares this year, the highest inflows among eight Asian markets tracked by Bloomberg after Taiwan.
