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Brace for a correction if history is any guide

MUMBAI: Traders are more likely to make money betting on a f..

MUMBAI: Traders are more likely to make money betting on a fall in the benchmark indices in the runup to the Union Budget in early February if historical stock market performance is anything to go by.

Data showed the benchmark Sensex has fallen in eight out of the last 10 counts in the one-month before the Union Budget. This included three interim Budgets. The Sensex has fallen in the range of 0.54 per cent and 6.90 per cent on these counts. Excluding the interim Budgets, the Sensex has fallen in nine out of the last 10 full-fledged Budgets.

Money managers expect the market to behave in line with the historical trend this time too given the expensive share valuations and growing chatter of the government bringing in Long-Term Capital Gains Tax in some form in the Budget. The rising volatility is also indicating nervousness in the market ahead of the Budget. The India VIX which had plunged to 10.16 on December 21 from the 52-week high of 18.26 on December 18 has again started to inch up and closed at 13.62 on Wednesday.

"We may see some correction as the market may be wary about two factors. Firstly, there is a possibility of long-term capital gains tax coming in the Budget; and second, the possibility of some slippage in the fiscal deficit path," said Jyotivardhan Jaipuria, founder, Veda Investment Managers.

Money managers added that there is a possibility of a correction also because markets have moved up 30 per cent over the last one year without seeing any major correction.

Also, share valuations are considered pricey. The Sensex is trading at a trailing P/E of 25.07 times compared to the last five years' average PE of 19.81 times.

"We have not seen a major correction in 2017. A 3-5 per cent correction will be healthy for the market. If there is no problem in the Budget on these fronts we may see a relief rally," added Jaipuria.

Following the Budget, the trend has been largely positive with seven out of the last 10 Union Budgets, including interim ones. In a month after the Budget, the Sensex has gained 0.58-10.47 per cent.

While the market had risen on hope of steps to boost the rural economy after the Bharatiya Janata Party won the Gujarat elections by a narrowerthan-expected margin, there are still concerns over the fiscal deficit numbers, especially since oil prices are at elevated levels. The government recently said it plans to borrow an additional?50,000 crore in this financial year, raising concerns that it may miss the fiscal deficit target.

"The equity market is not fully factoring in the macro concerns. With more rural spending, things will look good for the economy due to higher spending but these steps tend to be a problem in the medium term," said Piyush Garg, chief investment officer at ICICI Securities.

Garg is of the view that the market correction in the near-term will not be deep unless global markets also correct.

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