History repeats itself: If this maxim is true, then now is the time to go long on Indian equities. Data from the past four general elections suggest that those investors who bought domestic equities three months prior to general elections and exited six months post polls have earned good returns in the Indian equity markets.
Political events usually have a great impact on the economy as a whole. The general elections in India, which are slated to be held in April-May 2019, are a make or break event for the Indian equities. At present, investors are cautious on Dalal Street amid unfavourable global triggers such as a speculated slowdown in the world economy.
In the past few years, the Nifty and the Sensex have been highly volatile. The markets were recently tested during the outcome of the Assembly elections in five states, in which the popularity of the BJP, which is also the ruling party in the Centre, came under scanner. In the 2014 general elections, the BJP won 10 parliamentary seats from Chhattisgarh, 27 from Madhya Pradesh and 25 from Rajasthan, totaling 62 seats from the three Hindi-heartland states. This is second only to Uttar Pradesh, in which the BJP won 71 seats. Though the general elections and the Assembly elections cannot be equated as the state elections are fought on local issues, questions have been raised on if Prime Minister Narendra Modi will return to power in 2019.
Whatever the outcome, as per data from the last 20 years, the markets have always shown resilience in its run up to the general elections irrespective of whether the incumbent government wins or loses.
Investors, both foreign and domestic, look for a strong government at the centre or a stable coalition which will continue to bring in progressive reforms and put a proper monetary policy in place. If crude oil remains range bound and the rupee strengthens, foreign institutional investments will gather pace and emerging markets will continue to cash-in on the weakness of their developed peers in the better part of 2019. A key point to be noted is that the markets have risen before the general elections in the past on the hope that a stable government will be formed. The markets always prefer a stable government with a strong leader over a weak coalition which can hamper implementation of major economic reforms as was seen in 1989, 1996 and 1998.
In the past four general elections, the markets have gained 3 out of 4 times. The time period of investment is three months prior to polling date and six months after the polling is completed. The exception was 1998 when markets suffered on account of the Asian Financial crisis. The Nifty gave the highest return of 68% in 2009 when the UPA government was reelected under the leadership of Dr Manmohan Singh. In 2014, when the BJP came to power, the returns from Nifty were 26%.
Election 2019 can bring in a lot of volatility in the markets. However, strong economic growth can offset this uncertainty. If the election results are in favour of BJP, then the markets may surpass the previous high with greater fervour. The investors will bet on those sectors which would be the government’s priority when it comes to power and if the government changes, then the market may witness a knee-jerk reaction coupled with high volatility. Market volatility confuses investors. It is therefore better to take time to build your portfolio and allocate funds when markets are spooked. Buy high-quality large caps when the markets look the most stressed.
The revival of private capex cycle is very important to support corporate earnings trajectory, as populist measures ahead of the election may apparently leave the government with a paucity of funds for incremental public spending. Moreover, likely slowdown in the global growth led by the trade war and persistent increase in oil stockpiles in the USA may keep the oil prices low and aid in maintaining CPI under Reserve Bank of India’s reference range.
In a nutshell, the market may witness gradual higher movement in the first half of 2019 and take a remarkable leap in the second half with emerging clarity about the political situation, reduced oil prices and soft headline inflation. So, tighten your seat belts and utilise the opportunity to maximise your portfolio returns.
The author is CEO of Karvy Stock Broking