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.

The Indian equity markets went up in euphoria on account of the return of Narendra Modi as prime minister. For the first time in its history, Sensex and Nifty crossed new milestones of 40,000 mark and 12,000 marks respectively. However the euphoria is likely to be short lived, as macroeconomic factors will catch up eventually. The new government faces a lot of challenges in reviving the economy ranging from consumption slow down, liquidity crisis, unemployment, stagnant private sector investment etc. On top of this, the global factors are not supporting either. There is an ongoing China-USA trade war that is impacting the entire world.

April month saw Sensex trading near its all time highs. However, mid and small caps continue to trade at more than 15% discount to their all time highs. While the valuation of large cap looks over-stretched, mid and small caps look a bit under valued. This is a kind of divergence which is pretty rare to see. Other flavour of the season are the general elections. There is always a risk of market instability due to any adverse outcome of the elections. Markets do not like uncertainty. As long as there is a stable Government at the center, we don't anticipate any adverse impact on the markets. However, if there is a weak Government that is formed at the center, there is a possibility of markets going down in the short term.

After a 9 month downward journey, equity markets were quick to recoup all the lost ground. Markets rallied by more than 7% in March. The Sensex and the Nifty are at the record highs now. The main reasons for this rally were strong inflows from foreign investors, hopes of a stable government at the centre, a rise in rupee against the USD, and expectation of a rate cut policy in April.

The Union Budget 2019 clearly focused on the middle class, farmers and small traders. It will be an income boost to the middle class and farmers. For the salaried class, the full rebate for the individuals who have income up to 5 lakhs is a step in the right direction. This will have a positive impact on the economy since lower middle class will have more cash to spend for their consumption. Tax relief for middle class and extra income for farmers is positive for consumption-related business, automobiles, FMCG and Pharma.