Historically, equity markets have always shown a bullish trend immediately after elections. This trend has prevailed since the last four general elections.
As predicted, even this time, the mutual fund sector is at an all-time low and is going to get even worse with the election dates nearing. However, signs of what is in store were visible when the markets revived by a few notches immediately after state poll results were declared late last December.
However amidst all this instability, analysts pointed out, large cap companies have always shown comparatively lesser volatility and their valuations have remained relatively reasonable over different market cycles, making it an all season choice even during the election year.
Devang Mehta, Head - Equity Advisory, Centrum Wealth Management, highlighted that election years bring along a lot of volatility, making the markets nervous more often than not. Hence, most participants prefer large caps, especially the bluest of blue chips, which are market leaders across sectors and already have great businesses. “However, the volatility has to be used to one’s advantage for picking great companies across the market cap spectrum to build a robust portfolio,” added Mehta.
His views are supported by Anuj Shah, Head-PCG, Reliance Securities, who said, “Stick to large cap as they reflect the broader market and sentiment.”
With the recent tapering down of the domestic retail money inflows, barring the monthly SIP inflows which continue to clock up every month, it is likely that the Foreign Institutional Investors (FIIs) will keep away from the event-driven election volatility.
Although election results are the key monitorable, Tavaga Research expects reforms to continue, irrespective of the party in power. The market performance is expected to be positive, once a clear mandate emerges. Till then, investors should try to stay away from volatility and a diversified portfolio (combination of debt, equity, gold and international equities) is recommended. In the case of a fractured mandate, the risk of FIIs selling would increase and even a decent bet on large cap index will not be fruitful. As a direct exposure to single stocks is risky, investors should avoid it.
Volatility is high in small cap stocks making them unsuitable for retail investors. “Market cap to Gross Domestic Product (GDP) have shown a positive trend, while large caps have historically represented more than half the market, making a strong case for investment. We believe the large cap funds offer an attractive long-term investment opportunity,” argued Ashutosh Bishnoi, MD and CEO, Mahindra Mutual Fund.
This trend has been visible in the last 40 years in India. It is also the phase when the Sensex was launched. During this period, the market was down only once by 50 per cent but on four occasions it was more than 50 per cent. Then if we take 20 per cent as a benchmark, then it was down at four occasions and on eight occasions it was more than 20 per cent. Bishnoi suggested, “It will always pay to buy large caps at relatively lower valuations - large caps are almost never cheap. So, if someone is building a new portfolio when large caps are cheap, that portfolio will give great returns for longer, than if you already hold a large caps portfolio.”
Another important aspect that has been noted is that whenever the markets were flat in the previous year it had given a return of about 18-20 per cent in the following year (especially after elections).
This is also another reason for investors to play safe with large caps, as its market capitalisation have always increased and has given high returns. “As we have seen in the past, the market around the election time has always been very volatile and volatility hits the mid cap and small cap the most. The biggest advantage of investing in large cap stocks is the stability they have. Also they have a reputation that they are less likely to be affected by a business or economic circumstance,” said Siddharth Sedani, Vice President- Equity Advisory, Anand Rathi Shares and Stock Brokers.
Analysts and economists pointed out, market cap and GDP are correlated. In the last 20-30 years, GDP has grown but the market cap has not, making investors feel that the market is over-valued.
So, the general suggestion from fund managers is a change in the portfolio. But churning the portfolio would make sense only if the underlying exposure is calibrated. That is, if the underlying risks remain on Indian equity markets, then changing from one mutual fund to another would hardly add value.
Investors should re-evaluate their portfolios and look for the companies having sustainable earnings with robust business outlook and quality management. “Historically, quality companies have generated best in class returns irrespective of any economic or political event,” Sedani further stated.
One of the ways to stay invested is by shifting exposure to the consumer sector, the valuations of which have already skyrocketed ahead of the general elections. But Deepak Jasani, Head Retail Research, HDFC Securities, strongly supports the change in portfolio irrespective of an occasion. “Portfolio review at periodical intervals (irrespective of election uncertainty) is advisable. In an era when the business models are being shaken by regulatory or technological disruption, an investor cannot afford to sit tight on a portfolio without reviewing it at least once in every six months,” said Jasani.
The old adage holds true for investors in the election year: Never keep all eggs in the same basket. It is always advisable to keep a portfolio which is diverse.
Anshul Saigal, Portfolio Manager and Head- PMS, Kotak Mahindra Asset Management Company, suggested some actionable regarding a portfolio management.
First, after over one-year of volatility, a portfolio leaning towards in mid or small caps may make greater sense. This is with the caveat that an investor may have to bear with volatility for some more time.
Second, look for quality names which have corrected and become attractive. Shift toward quality at this time.
Third, the strength of fundamentals should be recognised. If price action is adverse while fundamentals remain strong, then bearing the volatility and staying put is the best option.