Post the election outcome, market participants would expect a breather, considering the volatility in the markets in the past few months. But the worst is not over yet; markets await another tumultuous ride. After months of jam-packed campaigning and the election exercise, over a billion people in the world’s largest democracy patiently awaited the election outcome. The father of value investing, Benjamin Graham quoted: “Stock markets are voting machines in the short term but weighing machines in the long term". Elections are emotional times with high octane debates and people choosing sides but markets move only according to rational decisions when seen from a wider perspective. Any whipsaw during elections is just sentiment adjustments to the stock prices.
With 330+ votes, as trends until evening suggest, the National Democratic Alliance (NDA) surpassed all expectations and shocked everyone by winning the 2019 general election with a wide margin. If market levels are any indication of sentiment, then the masses have accepted the victory but a deeper dive reveals that the rally is unsustainable, as there was a 40% open interest increase in future and option (F&O) positions from exit polls to results day in 2014, whereas in 2019 elections the increase was just 5%. This depicts that there is pressure due to other micro/macro factors, which is causing risk averseness among the market participants from taking new positions.
In the past five years, over 30 countries went to elections and even though the outcome seen in such countries varied from incumbent government formation to anti-incumbent government formation, the highest volatility was in the range of -2.5% to 2.5%. In contrast, Indian markets have risen 7.4% as of date since polling started. On the grounds of mean reversion, it is expected that a pullback is imminent. At the same time, given the liquidity concerns and slowdown in automobile and consumption, Nifty earnings have contracted, thereby expanding Nifty’s PE to 29x, signifying the expensive valuations on the benchmark index which keeps very little room for any margin of error. This affirms today’s market fall even though the Bharatiya Janata Party (BJP) single-handedly won more seats. At such times, it is better to let markets correct and invest rationally, rather than emotionally.
This was from a broader macro perspective but if looked at closely into Corporate India, the current result season is a mixed bag; certain sectors outperformed, while some underperformed. Looking at the fast-moving consumer goods (FMCG) sector which caters to the top to bottom strata of society in the income pyramid, it is visible that after the good and services tax (GST) honeymoon period, the sector reeled under the pressure of low volume growth and margin pressures. The cement sector had an outstanding quarter, given the pre-election spending of the government, but that is not going to sustain going ahead; they are set to underperform. Given the disproportionate weight of financials in the index, which soon will reduce as is talked about, there will be underperformance as Index funds will have to off laid if the rejig happens.
Contrary to the popular belief, PSU Banks are expected to make a catch-up rally, given the current wave of recovery. Majority of public sector banks have fared well this quarter and the future merger plans of these banks are expected to aid their earnings in the coming quarters. Last but not the least, the current disruption and demand slowdown in the automobile space is expected to linger, given the implementation of BS-VI deadline is fast approaching and the migration to electric vehicles. This will be a huge dynamic shift in the entire sector, causing enormous consumer migration from traditional to newer models.
India faces innumerable headwinds ahead due to trade wars, oil disputes, and other global factors which await the political overhang to dissipate and the grass-roots level issues to resurface. The Indian economy is set to experience many disruptions in the next five years, which will bring about iconic changes in many industries and the best way to ride it out would be to do an SIP in Index ETFs. However, a stable government will usher in the next bouts of reforms, which will firmly take India to an 8%-plus growth rate, but that may not happen overnight. It will take another two years to see that kind of growth in the economy, which will eventually be reflected in the stock markets. Traders should place bets only after volatility reduces. Markets will never stop surprising us, therefore sit back and enjoy the ride with systematic investing.
Views are personal.
The author is founder and CEO, Samco Securities