Stock markets have already reacted to exit polls that were announced on Sunday, May 19 evening. Tomorrow, i.e. May 23 will see the all-important results of the general election and the first signs of 17th Lok Sabha formation will be visible. For investors, this period i.e. post-election result, can mark the beginning of a difficult time for trading and investing. Election results are not decided by stock markets, or by political parties. In India, tens of crores of votes spanning across 543 constituencies will be counted and that will throw up the winners (and the losers). Nobody knows what will happen. With the proliferation of social media, everybody with access to an audience is virtually an expert and can influence minds. However, we think investors must not put their money based on hearsay and guesswork. Going to by historical numbers and past 'confirmed' trends mean nothing because this is a new election. Consequently, the results too will be different. As you prepare for this challenging time, we bring you 4 important things to keep in mind as you invest post-elections.
History does not repeat itself
2019 is not 2014, 2009 or 2004. It is a different year. Blindly investing based on historical trends can turn out to be hazardous. As you look at markets from May 23, there will be studies saying ‘election years are positive for the markets’. Do not fall for them. If markets did move in patterns, there will be no need for anybody to appoint expert fund managers or stock pickers.
In the past 3 general elections, we have seen that election years have been good for the markets. But, there is no guarantee that it will be the same in 2019. Post-election rallies or declines will be based on multiple factors. Most of these factors will quickly change. Human minds are trained to spot patterns, so there will always be somebody who will come up with patterns about post-election result investing. It is best to take such research and analysis with a pinch of salt.
Thanks to the Delhi-based national media, the Lok Sabha elections have been built as Narendra Modi vs Rahul Gandhi, or a BJP versus Congress fight. We will argue that the fight is much bigger than that. Election results are unlikely to throw a clean NDA vs UPA verdict. The role played by ‘others’ may be very important. However, as of now, only two options, or two ‘known knowns’, are being talked about --- Narendra Modi of the Bharatiya Janata Party (BJP) will get a second term as Prime Minister or Congress party-led now by president Rahul Gandhi would come back to power.
There is a third scenario. It is a ‘known unknown’. The diverse Indian voter base may have voted in such a way that a non-BJP and non-Congress coalition could stake majority and form the government. This happened years ago in 1996. The problem with the ‘known unknown’ is that financial markets know very little about this option. For instance, we do not know the policies, the ideology and the people in such a government. This could be known only over time and markets may react negatively initially.
Lengthy bargaining on coalition government formation
Unless one of the two main political parties i.e. BJP and Congress, and their coalitions i.e NDA and UPA get the majority on their own, the 17th Lok Sabha will see a coalition government based on post-poll alliances. This is a probable scenario. Coalition dharma is a tough one to crack, since it may involve multiple parties with their multiple demands. This means every day there may be a new development.
In case the two pre-poll alliances i.e. NDA and UPA do not get a simple majority, they will have to indulge in lengthy discussions as they try to form a government at the Centre. The bargaining process will be complicated, and hence do not expect the government to be formed quickly. Political parties like TMC, SP, BSP, YSRC, and BJD will hold the key in such a scenario. It is important to understand that coalition governments involve a lot of sacrifices for main coalition partners because they know that they have to acquire winning MP numbers to get past the magic figure of 272. Stock markets do not like uncertainty, so it is better to be prepared for a rough ride.
Moderate return market
Given the valuations of the domestic stock market, India should be a moderate returns market in the coming year or so. Once the election noise dies down, fundamentals will drive the market. In this scenario, your stock/portfolio selections will make a big difference. India has already moved up due to inflows, and this has led to rising valuations, even as earnings have continued to falter. In this backdrop, only a quality-focused, large-cap and defensive portfolio will stand the test of time.
This means your return expectations from the market must be tempered down. From a high double-digit return, try to make peace with a high single-digit return % from the domestic stock market. Try to keep IT, pharma, industrials, and FMCG picks in your portfolio. The portfolio bias has to be for 'safe' names, and this means you have to remain 'selective’. Indiscriminate buying across mid-cap and small-cap will not help if the returns from the overall market are moderate in nature.
One thing is for sure, there will be a surprise in the markets. By the end of May 23 night, you as an investor will have a good idea of how many seats have gone to whom. Now, begins the grind. It is quite likely that the mandate is slightly fractured, and this means more uncertainty and volatility. As a smart investor, your positions should be light and you must remain nimble-footed so that you can quickly move in or out depending on market mood.
If you are unsure of how to play the market immediately after election results are out, wait. There is no glory in dabbling in equities when you do not understand the political part of the puzzle. Sitting on the sidelines is a much better option if you come across such a situation. It is better to stay away from broker lists of ‘stocks to do well under this government’ because these are at best speculative bets based on little understanding of how the 17th Lok Sabha government will operate. Of course, if you have the conviction, go ahead and play markets as you deem fit.
The author is a journalist with 14 years of experience