Posted On Monday, May 12, 2014
Over the next few days, the much anticipated elections results would be out. As per many, that would decide the fate of the Indian economy and thereby where the markets are headed. The general feeling is that a stable mandate with one party getting a clear majority would be an ideal scenario which will ensure political stability and would kick start the reform process, reduce corruption and put our economy on a firm footing. Any other outcome like the third front or a lack of a clear mandate would ignite a selloff in Indian markets.
No one really knows what’s the mandate is going to be and how would the markets react to the results. Many investors are being optimistic and have their “bets-on” by being invested. Many are negative and thereby are saving their pot by pulling money out of the markets. Whereas, many or the majority are just waiting for the outcome and will take action based on the election results. Is that really a wise way to put your hard earned savings to work?
Before reaching conclusions, let’s see the markets reactions on the election outcomes:
|Sensex Performance (%)
|Over the term
|* Measures first two days of performance after the election results
From the table it can be concluded that the initial reactions of the market after the election results are no indicator of the stock market performance over the next five years of that government’s tenure. Stock markets performance over the long term depends on the development activities pursued by the government at the center. For e.g: in 1999-2004, the stock markets took favorable note of the new sworn in government with markets going up by 6% over the next two days of the results. But, over the entire term of that government, it just went up by 15% over the five year period.
However, in 2004, markets disliked the election outcome and initially prices tanked by -17% over the two days following the election results. But during the term of the government there was a return of 125%.
In 2009, markets hitting circuit breakers went up by 17% over the course of two days post the election result. However, over the entire term of the government it just went up by 84%. Large part of the gains has come over the last six months and many view these gains on growing optimism in anticipation of a stable government. If we were to deduct these gains and measure the market’s performance until August 2013 when markets were struggling amidst the political despair, the performance over the governments tenure would have dropped to just 43% over the five year period. This means that 17% of performance in the first two days and for the remaining until August 2013 it added just another 26% over the five year period.
The essence of the number crunching is to conclude that what is initially perceived may not hold over the long term. In reality, it’s the fundamentals that count. Elections really don’t have much bearing on the economy and thereby on stock markets. If you look at the chart below, since 1980, we have had many different political parties at the center and many of them being coalition governments; still India has continued to grow largely at the average growth which stands at 6.2% p.a. It is also worth noting that since 1980, the stock markets have grown by 22x.
Chart: India GDP growth under different governments
What we mean here is that no matter what governments come at the center, we would continue to grow around the average GDP growth rate and that’s a fair assumption to consider by looking at history. Government can help enhance the growth rates by their actions by a limited margin only.
Therefore, what should be an investors strategy be for investments in India markets?
One should stay invested in Indian equity markets at all times.
One would argue that it would not be prudent to stay invested when the market is boiling like the frenzy of 2007.
Exactly. One needs to lower their allocations to equities during such periods. And that period need to be defined by the fundamentals / valuations of the market and not by who would win the election.
The lower bound allocation to equities could be any percentage like 10%, 20%, 30% or may be 0% - really anything that you would be comfortable with. It would really depend on factors like your other allocations, risk appetite, etc.
Many times investors find it difficult to correctly position themselves depending on the valuation of the asset class and often get tend to follow the herd. This increases the risk of downside as their allocations are not in sync with the market fundamentals. This strategy may bring in initial gains but often are a subject to regret over the long term
If Investors find it difficult to value a particular asset class on their own and thereby are not able to position their portfolios optimally, then such investors should seek professional advice or allocate their hard earned savings to a true multi asset fund. The fund manager of a multi asset fund ideally performs a relative valuation of different asset classes and optimally position in each asset class so as to gain from the under / over valuation of one asset class over the other. Such a fundamental based strategy helps gain over the long term.
Invest in mix of assets like equities, debt and gold (as gold is one of the good portfolio diversification tools available today) through a true multi asset fund which has enough flexibility to shift its allocations from one asset class to another based on a fundamental reasoning.
Remember, you cannot take investment calls by just not by betting on the election outcome. However, you should also consult a financial advisor before selecting any tool for investments.
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