Followed by roller coaster rides of Indian equity markets over the last few months,  the Sensex touched its lifetime record high in the previous month. The Indian Markets which hit the record highs in June had a sharp pullback in July after the Union budget announcement of imposing higher surcharges on foreign portfolio investors. But the Sensex gained 11% since September 20th after the announcement of a cut in the corporate tax rate. 

The Indian markets had a rollercoaster ride last month. The markets headed lower during the first half of the month. It staged a sharp recovery on announcement of lowering of the corporate taxes. This could be one of the major turning points of the market in the days to come.

FinAtoZ Take

Recent corporate tax cuts will have a multiplier effect on the economy in the long run. This is a good time to increase your long term asset allocation in equities. Talk to your financial advisor for the same.

As we have been communicating during last few months, the Indian markets continued to trade weak in the month of Aug. Few economic indicators like Automotive sales and GDP growth numbers point to domestic slowdown in the Indian economy. Some of the global events like deepening of USA-China trade war did not help either. Logical question that would come to anyone's mind is that how deep is this economic slowdown? Is this as  bad as the recession of 2008? How long will it take to come out of this slowdown?

FinAtoZ Take

The economic slow down/recession is a normal phenomenon and part of the economic cycle. Government has introduced many policies and taken measures to revive the economy. These policies may or may not work in the short run. However, in the medium to long run, markets will certainly come back and reward the patient investors.  

As per Benjamin Graham, the intelligent investor should lookout for opportunities to buy low and sell high due to price-value discrepancies that arise from economic depressions and market crashes. We also believe in the same. The intelligent investor should not worry about the short term volatility. If possible, when the market goes down, he should invest more in equities which benefits him in the long term. Else, he should continue his periodic investments like SIPs etc and re-balance his portfolio to a slightly higher tilt towards equity with the help of his financial advisor.

Union Budget that was presented on 5th of July, has triggered a steep decline in the domestic India markets. Sensex has tanked by 6.2% and Nifty 50 by 6.4%. Mid and small-cap categories declined to the lowest levels in 30 months. 

Some of the main reasons for the market decline are unfavourable budget, poor corporate earnings and below-average monsoon.

Mid and small-cap indices fell to their lowest level in the last 2.5 years. This could however, be an opportunity for long-term investor to accumulate mid and small caps at dirt cheap valuations. Historically broader markets outperformed after extreme corrections.

Indian markets have corrected sharply post budget. This correction, in our view, provides a fantastic opportunity for the long term investor to increase allocation to equities as an asset class. If one re-computes the index after taking out top 10 stocks, the markets are down by about 10% on an year to year basis. The situation is even worse if you look at mid and small caps. The 2019 budget is negative for ultra-rich in terms of taxation. However, the Finance Minister has given a good provision to increase liquidity in the Indian banking system. Increase in liquidity will lead to a reduction in interest rates. This will in turn increase the margins of leveraged mid and small cap companies. 

As per FinAtoZ investment model, this is a very good time to increase allocation to mid and small caps for a 3+ year investment horizon.  It is also a very good time to increase allocation to PMS for a similar time horizon.