Investment strategy ahead of the Lok Sabha poll outcome

Investment strategy
Investment strategy ahead of the Lok Sabha poll outcome

In election years, the month of poll-outcome has traditionally been a volatile period for Indian equities. In 2004 market plunged more than 16 per cent after the UPA came to power with the help of Left. However, in contrast, the markets had skyrocketed 28 per cent after the United Progressive Alliance (UPA) emerged victorious on the back of an unanticipated rise in the Congress’ seat tally in 2009. The benchmark indices had risen 8 per cent in May 2014 following the landslide victory of Narendra Modi-led BJP.

The month of March and early April had already witnessed a meaningful pre-election rally in the headline indices while Mid and Smallcap stocks largely failed to participate. Since mid-April, we have witnessed a lack of aggression in the broader markets. In addition, the fierce posturing between the US and China around tariffs have sent global equity markets into a tizzy, benchmark Indian indices, Nifty and Sensex have already witnessed large corrections in the last seven trading sessions. This un-anticipated correction has shifted focus from the domestic poll results to global factors but has also led to the creation of a window of opportunity for value investors, as several bellwether stocks are now available at a discount ranging from 10-15 per cent.

Discounting global factors, in the Indian context, it appears that market has already factored in a victory for National Democratic Alliance (NDA) led by Narendra Modi, albeit with a reduced majority. That said, a negative surprise could lead to a meaningful knee jerk reaction to the downside based on the poll outcome. It is expected that till the results are officially declared the markets will be extremely volatile, a large spurt in volatility is expected on the trading day of May 20th when the outcome of the Exit polls would be priced in by the markets, the most important day, however, will be the 23rd when the results would start trickling in, it is expected that the market will witness wild gyrations as the results unfold.

With only a day left before the election outcome is known on May 23, what strategy should an investor apply? The important question is should one exit the markets or stay put? During this time the strategy should be set out as per one’s investment horizon and risk appetite. Long-term investors should have a different strategy from those of short-term investors who want to benefit out of the volatile market conditions.

Investment Strategy for Long-term Investor:

While for the short-term the election outcome can trigger a knee-jerk reaction, the medium-to-long term trajectory will be decided by the fundamentals such as corporate earnings and other domestic/global macroeconomics, developments. Investors who have an appetite for risk and can digest volatility should stay invested and those who are seeking a safer option, the prudent strategy would be to hedge the existing market position or trim exposure to high beta sectors such as non-banking financial companies (NBFCs), telecom, regular banking and insurance etc..

The long term investment is all about finding good companies with strong fundamentals, these companies do not get affected by the government of the day, however, at the same time, the government is responsible for creating a favourable economic environment which is conducive to all companies. If the election goes in favour of BJP led NDA it is expected that the coalition is likely to focus on capacity creation through rapid infrastructure development and in that context cement companies and corporate banks could be good be a good investment strategy.

One can also align to growth focus areas for the new government such as housing, consumer finance, tourism, healthcare for all and watch out for the nascent recovery in the Investment cycle. PSU and capital goods, have done well historically during elections on hopes of better policy mechanism post government formation and can be considered for investment tooThe traditional performing sectors – banks and fast moving consumer goods (FMCG) – could also do well. Irrespective of the sector one chooses to invest in, it’s always advisable to focus on individual good quality stocks that have decent fundamentals, have efficient management at the helm and have better corporate governance structures in place.

The countdown has already started for election results, there are four possible scenarios of outcomes and the markets are expected to react differently to each one of them. In case BJP manages to gather more than 272 seats, volatility will decline, markets will see a rally that would likely continue for the near-term. If NDA wins without BJP’s absolute majority, volatility will be moderate and markets will move with a positive bias in the short-term. Though a low probability outcome, but if the opposition gets a majority, the markets may react negatively in the immediate aftermath, but the short-term trend would still be positive as the markets like stability. The worst case scenario however extremely unlikely would be a Third Front Government with Congress’s outside support, that outcome would be disastrous for both short term and medium term as such coalition would inherently be unstable, if that happens volatility will be heightened and markets would fall into a tight bear grip.

Investors are therefore advised to remain cautious, all possible scenarios of election outcomes should be analyzed and the investment portfolio should be adjusted pro-actively based on the outcome of the elections, the best case scenario and perhaps the most likely at-least at this point remains the possibility of Narendra Modi coming back in one form or the other and the markets are expected to react positively to that outcome.

This article has been contributed by Rahul Agarwal, Director, Wealth Discovery/ EZ Wealth