Whether it is the Union Budget or election results, investing decisions are always impacted by these events. For instance, the uncertainty over taxation of participatory notes (P-notes) introduced in the Budget caused a lot of volatility in markets last week till the Finance Minister clarified the issue on Friday. Similarly, the Greek debt crisis or a slowdown in China or some local factors keeps investors on their toes.
Market movement depends on factors such as, politics, inflation, interest rate, exchange rate and Gross Domestic Product, changes in ruling parties, elections and many more. In fact, there are so many factors that it is difficult to narrow in on one specific reason for stock prices movement. Rather, stock market prices are always affected by a combination of factors.
We have collated data for the National Stock Exchange's (NSE) Nifty50 index or Nifty and four prominent stocks from March 1 to March 29, 2012. In this period there were two major announcements, one the RBI cut CRR on March 09, 2012 and the Union Budget 2012-2013.
As it can be seen, Nifty has either moved up or come down on expectation or the actual announcements. It came down by approximately four per cent from the beginning of the month due to the tax proposals announced in the Budget, among other things.
An important observation that can be made, here, is that the price of stocks like State Bank of India (SBI) and BHEL have gone down whereas defensive stocks such as Glaxo Pharma and Hindustan Unilever have gone up. The inference from the same is that the announcement and events have lower or no impact on defensive stocks.
Here are some factors that lead to stock market fluctuations.
Policy initiatives: Government comes out with different policies at various points. These announcements may either have a positive or a negative impact on the stock market.
Inflation: This data is very critical for any economy. During inflationary times, the stock market is depressed whereas when inflation is low, the stock market is bullish. If there is deflation, then it is not a good sign as it means the economy is not growing.
Union Budget: The key financial proposals are announced by the government in the Budget. The same is presented before the beginning of every financial year in the Parliament. The changes in tax rates, introduction of welfare schemes, subsidies given and so on have a significant impact on the equity market. For instance, fertiliser stocks are impacted if there is any announcement of reduction or increase in subsidies.
Economic data: The economic data announced by India or any other country has a bearing on stock market prices. Like, if there is deceleration of growth in US or any other developed countries, there is a negative impact on equities of the developing nations like India also.
Other events: There are other factors that can either drive up or make stock markets plummet. These include global events like wars, political unrest, crime, fraud, changes in oil and energy prices. These distant or unrelated events can actually have quite a direct impact on the prices of stocks and can create lasting trends if they persist. These factors also include foreign currency rates since they have a direct impact upon the stocks in those countries. If the rupee drops, you will see changes in the prices of information technology and related stocks.
| INVESTMENT SHEET | |||||
| Date | Nifty | SBI | BHEL | Hindustan Unilever | Glaxo Pharma |
| 1-Mar-12 | 5,339.75 | 2,218.75 | 299.70 | 380.35 | 2,087.40 |
| 7-Mar-12 | 5,220.45 | 2,141.55 | 271.05 | 385.00 | 2,083.40 |
| 9-Mar-12 | 5,333.55 | 2,226.40 | 278.75 | 382.25 | 2,084.00 |
| 12-Mar-12 | 5,359.55 | 2,310.80 | 284.95 | 380.55 | 2,082.90 |
| 16-Mar-12 | 5,317.90 | 2,227.90 | 273.60 | 390.20 | 2,140.45 |
| 28-Mar-12 | 5,194.75 | 2,079.25 | 252.15 | 412.50 | 2,256.80 |
| 29-Mar-12 | 5,178.85 | 2,061.35 | 248.75 | 408.35 | 2,223.75 |
| Data taken for period between March 1, 2012 and March 29, 2012 | |||||
Fluctuation in stock markets is a given factor. Investors should be able to mitigate the risk by portfolio diversification. Defensive stocks such as those in pharmaceutical, FMCG and power space can be invested in. But don’t go overboard in a particular stock or sector.
Individuals who invest for future goals, need not get affected by event based fluctuations, which is common as there is some data / announcements made and markets getting affected. Over the long term (3-5 years), effects of such short term movements get mitigated. Also, it may not be possible for you to predict market behaviour. Therefore, it is advised that individuals stick to long- term investments as this not only cuts a lot of risks it also gives better returns of 10-12 per cent annually, on an average.
The write is a freelancer
