We are just a few days away from the first budget of Modi-led-NDA Government. It comes at a time when expectations are unimaginably high and macro-economic conditions are extremely challenging. Yet, the Indian equity markets are going strong. The S&P BSE Sensex has rallied nearly +5% over last one month and on a year-to-date basis nearly 22%. And even now as we are writing to you, the markets are sailing in uncharted territory, scaling new all-time highs.

As you know, the performance of the Government has been mix so far. A few bold decisions have been taken and some of them have been controversial as well. It is widely believed that the first budget of this Government will give guidance for coming years. Investors are expecting a budget which will boost economic growth, encourage investments and assure good governance. The finance minister has also hinted that there wouldn't be many populist decisions taken. To build brand India and attract foreign investments, the focus may remain on building sustainable infrastructure; which is expected to provide boost to infrastructure related sectors. Thus on these hopes, infrastructure theme has reemerged and infra stocks have rallied.

Will these sectors disappoint post-budget?

Index	1-month Returns (%)
S&P BSE Capital Goods	10.1%
S&P BSE Realty Index	9.6%
S&P BSE Power Index	7.0%
CNX Infrastructure	6.7%
S&P BSE SENSEX	4.9%

Data as on June 30, 2014
Since the returns are for 1 month period, they are expressed on an absolute basis.
(Source: ACE MF, PersonalFN Research)

Why are these sectors rallying?
Prime Minister, Mr Narendra Modi has stated that focus of his Government would remain on rapid development of highways, railways, ports and power. It is expected that, NDA Government would revive the National Highway Development Programme. Moreover, the Government is likely to introduce time bound plan for implementation of infra projects. Minister of State (Independent) for Environment, Forest and Climate Change, has already promised faster clearances to infra projects, without compromising on environmental issues. The NDA Government also wants to develop at least 100 smart cities across the country.

You see, Mr. Modi has already abolished the system of Empowered Groups of Ministers (EGoMs) and Groups of Ministers (GoMs), and this in our view is a positive step to speed up the process of decision making. It is also now expected that the Government will take efforts to improve bureaucracy and cut down red tapism, and thus has already released a 10-point agenda for good governance.

But there are some challenges...
Government has a tough task of curtailing deficits and boosting growth. The fiscal deficit for the current financial year has already reached 45% of the full year target. Although this is mainly due to carried forward subsidies of Rs 35, 000 crore, it may restrict the ability of the Government to allocate higher amounts for developmental projects. Scanty rainfall so far, also poses a risk of high food inflation. Geo- political tensions in Iraq and Syria may continue to affect the oil prices until the issue is resolved completely.

So how is the equity market likely to move post budget?
Over last 10 years, total 12 budgets have been presented including 2 interim budgets. The analysis of past 10 years suggests that when markets enter a budget with a lot of expectations, they tend to fall and vice versa. It was only once, i.e. in 2006, that the Indian equity market generated positive returns in immediately preceding and succeeding month after the budget. On the contrary, 6 occasions markets rallied post budget.

PersonalFN believes we are entering a budget with bullish sentiments. Market valuations are at an all-time high and would soon appear 'over-valued' territory if fundamentals don't improve. Indian economy is still gripped with chronic problems such as inflation and deficits.

PersonalFN is of the view that, you refraining from speculating about stocks or sectors that may benefit in the coming budget. In case of any disappointment, there is a possibility that markets may fall sharply. While you may still invest in equities if permitted by your risk appetite and asset allocation chaked out for you, we recommend that since the valuations are appearing stretched an probability of a corrective after the announcement of the budget, opting for Systematic Investment Plans (SIPs) offered by equity mutual funds would be appropriate, as this would enable you to manage the volatility better through rupee-cost averaging and power your portfolio with the benefit of compounding.

Also now that the markets are at all-time high, it would wise to review your existing investment portfolio and get rid of those equity investments, including mutual funds which aren't performing. At PersonalFN we have helped several investors to build robust equity portfolio through our mutual fund research service - FundSelect, and we recommend you too not miss out on this valuable service, which has helped many investors grow their wealth.

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