Post-Election Investing Guide: Strategies for Smart Investors

Narendra Modi’s reelection for a third term as Prime Minister of India is sending ripples through financial markets. Indian stock markets are showing signs of correction as his NDA coalition won by a narrower margin than expected. Concerns may also emerge about the impact of social welfare schemes on economic growth. However, we are optimistic that the current government can balance these priorities.

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Given this interesting backdrop, Indian retail investors will need to adopt well-informed strategies to effectively navigate the volatile post-election period.

How the election will affect financial markets

Election results often lead to volatility in financial markets. The re-election of the Modi government, albeit with a smaller majority, initially created some uncertainty. This volatility was manifested in the sharp fluctuations in major indices such as the NSE Nifty 50 and the S&P BSE Sensex, which spiked following initial exit poll projections but subsequently corrected once the actual results became clear.

1. Policy certainty and reform trajectory: Coalition governments typically raise concerns about policy continuity and reform implementation. Investors may want to brace for a change in policy direction.
2. Market Correction: The high valuation of the Indian equity market has been corrected due to the uncertainty over the election outcome. Nevertheless, the market has recovered and touched new highs, indicating a resilient growth outlook.
3. Economic fundamentals: India’s strong growth outlook, manageable inflation and favorable fiscal indicators continue to support a bullish secular market outlook.

Practical Strategies for Investors

Given the current market trends, retail investors can adopt several strategies to adapt and succeed.

1. Focus on valuations: As markets adjust to the election results, lower valuation multiples are needed to factor in the risk of a coalition government. Investors should focus on stocks with reasonable valuations and high earnings prospects. Avoid paying high premiums for speculative stocks.
2. Sector shift: Trader favourites like defence, railways, manufacturing and state-run enterprises may see valuations moderate. Diversify into sectors with stable growth potential, including infrastructure, Make in India and sectors aligned with PM Modi’s vision for energy independence.
3. Historical insight: Historical data (see table) shows that Indian equity markets tend to stabilize and deliver positive returns within six months of elections, even under coalition governments. This historical resilience should assure investors of potential gains despite short-term volatility.
4. Focus on long-term growth: Continue to invest in areas aligned with long-term development objectives, such as infrastructure, rural incomes, job creation and poverty eradication. These areas will be the Government’s continuing focus and are likely to foster growth and stability.
5. Risk Management: Given the current situation, it is important to manage risk through diversification and avoiding over-leveraging. A diversified investment portfolio will help mitigate sector-specific risks and reduce the impact of market volatility. In simple terms, continue with your Systematic Investment Plan (SIP) in mutual funds, a proven and good tool for cost averaging, and ensure it is in line with your risk tolerance and long-term goals.
6. Large Cap Stocks to Watch: Recent market movements may have increased volatility in the domestic market. As a result, some investors may prefer to invest in high quality, stable stocks, while some may prefer stocks with a defensive bias. This may lead to more capital inflows into large cap stocks in the short term. Therefore, remain invested in the market and use the price drop as an opportunity to buy stocks of high quality companies with predictable earnings.

Despite the recent market correction, the outlook remains optimistic. There are no major bubbles in India’s banking, corporate or housing sectors. We believe the election-driven market correction has reduced market leverage, contributing to a more sustainable growth trajectory.

Moreover, India’s strong macroeconomic fundamentals, including growth prospects, subdued inflation and fiscal progress, provide a solid foundation for continued market optimism.

Final conclusion

In conclusion, navigating the post-election market requires a strategic approach based on valuation focus, sector diversification, historical perspective, long-term growth investing, and prudent risk management.

As India continues on its growth trajectory under the leadership of Prime Minister Modi, investors can take advantage of the opportunities presented by market stabilization. By adopting these strategies, retail investors can not only weather the post-election volatility but also position themselves for future gains in a changing economic landscape.

-The author is Chairman and Managing Director of Inventure Growth and Securities. Views expressed are personal.

First revealed: 21 Jun 2024 12:57 IST