How To Navigate Equity Markets During Elections
In the 9+ years since the Modi-led-NDA government has been voted to power, several structural reforms have been implemented such as Make in India (to promote manufacturing in India), PLI (Production-Linked Incentive) Scheme for various sectors in the manufacturing space, start up India to (promote the culture of entrepreneurship and innovation), Digital India (to make India a digitally empowered society) among others. The GDP growth, thus under the Modi-led-NDA on average has been around 6.0% making India the fastest-growing major economy of the world and a âbright spotâ.
The equity market, as a result, has gone on to create wealth for investors. The bellwether, S&P BSE Sensex, clocked a return of +10.8% CAGR (as of October 31, 2023), while the S&P BSE Midcap and S&P BSE Smallcap, during this period have fared relatively better clocking +15.8% CAGR and +17.7% CAGR, respectively (as of October 31, 2023).
The Equity AUM of Indian mutual funds, as a consequence, also has reported a phenomenal rise with very encouraging participation from individual investors.
Information technology, pharma & healthcare, construction & engineering, defence, capital goods, banking & financial services, renewal energy, EVs and sustainable transport, auto & auto ancillaries, logistics, agriculture & allied industries, e-commerce and the consumption theme have largely been beneficiaries since May 2014.
However, along with the positives, there have been negatives as well.
Unemployment hasnât been tackled by the Modi-led-NDA government. 10 million jobs each year will be created promised Mr Modi in 2014. But these number of jobs arenât created by the current dispensation. What we are essentially witnessing is jobless growth. The question is, how will India reap a âdemographic dividendâ if enough deserving and well-paying jobs are not created?
In the run-up to a few state elections this year and general elections next year, unemployment will be a pressing issue for the government to tackle. Modi 1.0 and 2.0 so far have failed to create enough jobs.
Also, the rising cost of living or inflation, particularly in the last few years, has been a concern. The price of food and cooking gas has gone on to pinch the common manâs pocket. While the RBI through its monetary policy actions has tamed inflation from the earlier highs, prices of certain items are elevated. The finance ministry recently admitted that inflation is still a risk, and the government and the RBI are on high alert for it. The central bank is particularly worried about the rise in food prices. Besides, higher borrowing (due to less transmission of policy rates) is likely to temper demand.
Amidst assembly elections in certain states at present and in the run-up to the Lok Sabha (general) elections between April and May 2024, both the current dispensation and the opposition would level allegations against each other to garner votes. But whether there is anti-incumbency is difficult to say. What the voters and the capital markets expect is political stability with structural reforms being rolled out and a conducive policy environment for India to continue growing.
Graph: GDP real growth rate across 10 governments
Note: Note: The number in the red rectangle is from a changed data series starting Jan 2015. While a âsuperiorâ series, there is no comparable number to equate the âNewâ with the âOldâ. Most economists deduct 0% to 1.5% from the âNewâ to equate to the âOldâ; therefore, under Modi, the GDP has been at 5.9% at best matching the 5.6% under the BJP-led coalition government of Vajpayee resulting in a rout for the BJP at the time of the next election in 2004. ** Please note that data used for World GDP for 2021 & 2022 is a median Estimate since World Bank data is not yet available and India GDP data is the governmentâs third advance estimate released at the end of August 2023.*
Source: RBI and www.parliamentofindia.nic.in; data as of June 2023.
As seen in the graph above, the GDP growth across 10 governments has been 6.2% p.a. over the past 40 years. In our view, even if Indiaâs GDP grows around the average GDP growth rate of around 6.0%, it would be decent enough to generate wealth.
Equity markets in the past have witnessed a positive trend in the run to general elections. If the outcome of the general elections is other than what the market expects, there may be a sharp knee-jerk reaction. But as long as structure reforms continue to be rolled out, by whichever government is in power, markets shall do well in the long run.
For the equity markets, corporate earnings continue to play a vital role. Thankfully, the earnings trend in the last few years has been encouraging and justifies the premium that Indiaâs equity markets command relative to its global peers.
That being said, it would be unwise to get carried away by irrational exuberance and unrealistic earnings estimates. Particularly when there are ostensible clouds of global economic uncertainty and geopolitical tensions, you ought to be careful.
In the near term, the key risks to the equity markets are:
- Ongoing geopolitical tensions (Israel-Gaza war, Russia-Ukraine war, tensions between India and China, India and Pakistan, China and the United States, China and Taiwan, and North Korea-South Korea, among others)
- Chances of economic fragmentation and possible chain disruptions (which may lead to higher headline inflation)
- Forecast by the National Oceanic and Atmospheric Administrationâs climate prediction centre of strong or super El Nino weather conditions next year, which could affect water availability, food production and prices
- Central banks keeping policy interest rates elevated (due to inflation)
- Tighter financial conditions in the U.S., U.K., the EU, and China
- The upswing in 10-year bond yields in the U.S. and India (due to elevated inflation, energy prices, higher policy interest rates, and higher government borrowing)
- Projections of a potential recession in 2024
- And national elections in India and the United States â the two largest democracies of the world
In such times volatility is likely to intensify. Recognising the risks, many fund houses in certain schemes are taking cash calls (i.e. holding high cash allocation).
What Should be Your Equity Strategy to Navigate Volatility?
For investors, it is important to tread cautiously rather than going gung ho. In the words of legendary investor, Warren Buffett, âBe fearful when others are greedy, and greedy when others are fearful.â
Avoid going overweight or skewing your investment portfolio. Diversify your portfolio suitably.
It would be prudent to hold a Value Fund, Small Cap Fund and ESG Fund as part of your diversified portfolio which could help push up the returns in favourable market conditions.
It is also important to have exposure to other asset classes â in a sense follow a multi-asset approach (invest in equity, debt, and gold). For tactical asset allocation to equity, debt, and gold, a Multi-Asset Fund would be a meaningful choice now (keeping a time horizon of 3 to 5 years). Alternatively, depending on the asset allocation best suited for you could follow a suitable portion to a Liquid Fund, and Gold ETF (or a Gold savings Fund).
When you are considering mutual funds to add to your portfolio, understand their distinct investment mandate, portfolio characteristics, philosophy of the fund house and whether they follow sound investment processes and systems to drive performance in the long run. Do not just pay attention to past returns, which are in no way indicative of the future.
Lump sum or SIPs
To navigate through the current uncertain times and volatility, it would make sense to take the Systematic Investment Plan (SIP) route. SIPs shall mitigate the volatility with its inherent rupee-cost averaging feature, instil the necessary discipline of continuing with investments even during turbulent times, make timing the market irrelevant, and potentially compound your wealth in the long run.
If you are already SIP*-ping* in some of the best mutual fund schemes out there, do not make the mistake of stopping or discontinuing your SIPs petrified by the market volatility. It could put brakes on the power of compounding.
Finally, be a thoughtful investor, approach your investments with discipline, patience, and set realistic return expectations. Keep in mind, that for every level of return you seek, there is risk.
Happy Investing!
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.