Budget 2024 Market Strategy: Focus on fundamentals amid volatility, says Trivesh D of Tradejini

The market's behaviour one week before and after the budget often displays intriguing symmetrical patterns. It is common to observe market volatility in the days leading up to the budget. In a recent note, Trivesh D, COO, Tradejini, pointed out that traders frequently secure profits and hold cash, cautious of the unpredictable nature of budget announcements.

Market reaction

According to the market expert, market responses to budget announcements can be erratic, showing no clear correlation with annual performance.

For instance, in February 2003, the NDA government's introduction of new taxes led to a 0.5 percent gain in the Nifty 500 on budget day, only for it to plummet 6 percent a month later. Yet, a year later, the market had doubled. Similarly, in July 2004, the UPA government abolished the long-term capital gains tax on equities, a move expected to favor investors, but the Nifty 500 dropped 3.2 percent that day.

According to a study, in February 2015, the NDA government's plan to reduce corporate tax to 25 percent resulted in a slight 0.4 percent increase in the Nifty 500 on budget day, yet the market fell 3.6 percent a month later and ended the year down by 18.7 percent. In contrast, in 2018, the Nifty 500 experienced a slight decline of 0.1 percent on budget day and a 4.6 percent decline one month later, following the reinstatement of the 10 percent LTCG tax on annual gains exceeding ₹1 lakh, informed the expert.

Key considerations

Several factors could influence the market in the upcoming months:

Global landscape: Trivesh D noted that the rising US interest rates might dampen investor sentiment and result in foreign portfolio outflows. However, India's growth potential remains attractive for investment.

Mid-cap and small-cap caution: He further warned that despite their impressive year-to-date gains of approximately 21 percent, their valuations could be overstretched. A correction is plausible, emphasising the importance of focusing on fundamentals and preparing for volatility, added the expert.

Pre and post-budget expectations

According to Trivesh, the forthcoming budget is expected to prioritise infrastructure development and enhanced connectivity, likely benefiting the construction and steel sectors with projected growth rates of 8 percent and 12 percent, respectively. Additionally, the defence and tourism sectors could see gains from sustained capital expenditures.

He further noted that election pledges related to affordable housing, healthcare, and renewable energy are expected to result in budget allocations, presenting investment opportunities in these areas. Given the anticipated government priorities, maintaining a focus on infrastructure and power sectors appears prudent. The recent dividend payout from the RBI will be crucial in offsetting any slippages in tax revenue or increased public spending in FY25. Tax reductions targeting the middle and lower-middle classes could stimulate consumption, added the expert.

However, adopting a wait-and-see approach may be more effective, allowing investors to analyse post-announcement implications and make informed decisions in relevant sectors, he advised.

Post-budget expectations

Once the budget is announced, the tax implications will be critical for both businesses and individuals, highlighted Trivesh. Anticipated changes include corporate tax rate adjustments, amendments to the GST Act, potential retrospective tax reliefs, rationalisation of capital gains, and incentives for sectors like manufacturing and renewable energy, according to the expert. Adjustments to income tax slabs or increased deductions for savings and investments will be particularly significant for individuals, with expected relief for the middle and lower-middle classes.

After the budget announcement, markets typically undergo an adjustment period. This phase offers an opportunity to assess the detailed implications of the new policies, Trivesh pointed out.

Beyond the budget hype

While short-term volatility is inevitable, long-term market performance hinges on fundamental factors such as corporate earnings growth and other economic indicators, noted Trivesh. He further stated that while the budget is a pivotal event, its immediate impact on the market may be transient. Long-term success depends on a disciplined strategy founded on solid fundamentals rather than short-term speculation, advised the expert, adding that by remaining vigilant and patient, investors can lead the budget season effectively.

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.