Heads up: Market could fall 5-10% if Budget disappoints; use dips to buy quality stocks

Finance Minister Nirmala Sitharam will unveil the first full Budget after the return of Modi-led NDA government at the Centre on February 1, and according to multiple analysts, Nifty could register a 5-10 percent fall on or after the Budget.

In the lead up to the annual event, both Nifty and Sensex touched record highs. The S&P BSE Sensex rose above 42,000 levels while the Nifty50 scaled 12,400. Analysts say that this could be one of the reasons for the massive fall.

The recent sell-off in the market has moderated valuations but the risks still remain high in case the Budget fails to meet market expectations, experts said.

technical View: Nifty forms Inverted Hammer pattern, volatility seen ahead of F&O expiry
However, investors should use dips, if any, to go long on quality stocks, they added.
“In the last three weeks, the market has already seen a sharp rally of 450 points on the Nifty. Any disappointment in the Budget could lead to profit-booking, but we do not see Nifty breaching 11,600 levels. Hence, investors should use the dips to buy quality stocks,” Dharmesh Shah, Head – Technical at ICICIdirect.com told Moneycontrol.

Bulls took control of the D-Street in five out of the last 10 years on Budget Day, data suggests. So far, the Sensex has seen a movement of negative 1 percent to positive percent.

But this year, experts suggest Nifty could fall 5-10 percent if the Budget disappoints.

“We agree that if any disappoint happens, the market could crash by at least 10 percent. The reason behind the same is a lot of unrealistic but most needed expectations from market participants,” Shrikant Chouhan, Senior Vice-President, Equity Technical Research, Kotak Securities told Moneycontrol.

“Cutting personal tax, removing the tax on long term investments, reducing dividend and distribution tax. If the government acts on these expectations then India’s Deficit will be on a toss. If FM has any specific and concrete plan and advice from experts to introduce then it would be executable,” he said.

Investors will keep a close watch on the fiscal deficit number. Most analysts we spoke to feel that the government will breach the 3.3 percent of GDP target for FY20 by at least 30-50 bps. Any slippage of more than 3.8 percent could spell bad news for the bond market, suggest experts.

The government may also reduce or abolish long-term capital gain tax which may significantly improve investor sentiments, resulting in further re-rating of the entire Indian equity market.

“The budget may be tilted towards stimulating growth by extending the existing tax rebate to taxpayers having an income upto INR 1mn which may accelerate earnings largely led by higher volume growth for all consumption linked stocks,” Antique Stock Broking said in a report.

“Expectation is running high from the upcoming Union Budget to provide stimulus to revive the economy. Any disappointment could lead to a 5-10 percent correction in the overall market. We project a 3.5 percent FY21 fiscal deficit to GDP (vs 3.0 percent as guided earlier but lower than our expectation of 3.9 percent in FY20), as it will allow for some flexibility in spending on flagship schemes,” it said.

Post Budget Returns:

The Nifty50 index has remained net flat since the start of the month, while mid, and especially smallcaps have outperformed the frontliners.

Anecdotal evidence suggests that Nifty plunged up to 9 percent in the month following the Budget in at least three out of 8 Budget months while giving positive returns in three other years.

Expectations from the budget revolve around tweaks in personal income tax LTCG on capital markets, import duties, etc., ICICI Securities said in a report.

“The expectations are high from the upcoming budget, we will not be amused if the budget does not dole out many positive surprises. We must keep in mind that growth measures introduced in the recent past are yet to bear the desired fruits, in terms of demand and consumption growth,” Ajit Mishra, VP Research, Religare Broking told Moneycontrol.

“Therefore, in case the budget fails to meet the market expectations, we may witness profit-taking post the event,” he said.

Budget Day 2

Expert: Rajesh Palviya, Rajesh Palviya, Head Technical & Derivative Research at Axis Securities

How is Nifty placed technically ahead of Budget?

Market participants have high hopes from the upcoming Budget, with many expecting superfluous measures to revive the economy. This is likely to drive momentum in the markets in the coming sessions.The Nifty50 has failed to sustain near the all-time highs of 12,400. On the weekly timeframe, the index has made a Bearish Engulfing pattern – short term reversal pattern indicating profit booking at higher levels.

However, follow-up negative close will confirm the above-mentioned pattern. It has also closed below the 20-Day SMA and 50-Day SMA further confirming the bearish thesis. Also, RSI has closed below the reference line for the first time since September 19 indicating the possibility of profit booking at current levels.

On the daily chart, the index has made a series of higher highs and higher lows since November 19 but RSI has failed to confirm the same. This indicates a negative divergence which is a bearish sign.

Important support for the Nifty index in the near term is around 11,900-11,500 levels and resistance is 12,300-12,430 levels.

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