Election outcomes generally tend to draw dramatic reactions from the Indian stock markets. Markets on Monday, a day before the state elections, ended down 2% owing to the results of the exit polls, which hinted towards a losing streak for the ruling party at the centre. However, the benchmark indices, against popular opinion, closed in the green on Tuesday, with the Sensex closing 0.54% higher at 35150 and the Nifty closing 0.58% higher at 10549. This was despite the changing political scenario.
The fact that all of us need to note is both BJP and Congress are willing to tow the capitalist path towards growth. As far as the performance of the stock markets and mutual funds is concerned, all that matters is the consistency in rolling out economic reforms coupled with a stable government at the centre. Over the past 4 years, Modi-led BJP government has made some really bold economic moves such as the introduction of GST, FDI in the insurance sector, and demonetization. That said, the Congress party also had its time during the early 90s when they introduced major economic reforms, which changed the economic roadmap of India.
Markets generally tend to react a lot more when there is an unstable government at the centre in a long bearish phase. In such situations, often the ruling party is forced to depend on many other political parties. A good example of this is the last time NDA government was in power, it was forced to depend on around 28 political parties. It is often seen that in such situations the focus of the central government tends to shift away from introducing new economic initiatives to more of a survival strategy, which does impact the markets.
Now, it is too early to make any such predictions. There is a good chance that most investors remain a little more cautious until they get a bit more clarity after the Lok Sabha elections in 2019. It is important to note that just ten largecap stocks have been part of the 5% BSE Sensex rally thus far in 2018. Excluding these stocks, the other stocks have lost approximately Rs.20 lakh crore in terms of markets cap. Around 1,000 stocks have lost more than 50% in terms of their market cap.
That said, a large number of value stocks have been trading attractively at single digit PE, discount to adjusted book values, or at dividend yields of 5-6%. Another key observation is that more than 75% of the stocks are already enjoying a deep bearish phase. Moreover, their valuations are highly appealing as well for investors. Hence, as an investor, during times such as the state elections, rather than worrying about uncertainty of the results, it is always better to invest in such attractive stocks from a medium-to-long term horizon.
State elections and market cycles are events, which will come and go. However, what the investors must note is the fact that the markets have historically been rewarding for those who plan for a long-term. In the past, it was seen when two top national parties got near majority, stock valuations may possibly shift vertically overnight. Thus, investors are best advised to remain invested in value stocks during events such as state elections. The other things investors can contemplate doing is to spread their money between equity and safe fixed income securities. The key thing to remember is not to invest in companies with governance problems or financial issues.
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