The rupee seems to have got into the character of the Indian cricket team. When all seemed stable and predictable, it has now failed itself and has sunk to depths unseen before. The India-England test series unravelled similar performances, especially in the fourth test, from the men in blue.
Face Off: Market Performance And Election Results
COMING SOON: THE GREAT INDIAN GENERAL ELECTIONS
The rupee seems to have got into the character of the Indian cricket team. When all seemed stable and predictable, it has now failed itself and has sunk to depths unseen before. The India-England test series unravelled similar performances, especially in the fourth test, from the men in blue. Cricket enthusiasts and non-enthusiasts alike had punted their money on Kohli, Root and other big names to perform in this test but then they lost their bets to the unpredictability of the game and its players. Another unpredictable game or rather event will unfold itself in the coming months – the great Indian General Elections. We advise you not to lose your money by punting or making some sudden investments and there are reasons for the same.
PRE-MATCH CONFERENCES COUNT FOR NOTHING
In the third test match, the Indian cricket team had bounced back from a 0 – 2 deficit and won the match by a handsome margin of 203 runs. It prompted the coach to say in the press conference that the intent is to be the best travelling side in the world. Unfortunately, the performances on the field in the next game didn’t match up to the words. In the next few months, a lot of words are going to be spoken, written and published, however, the market performance will not be dependent on those words. For all the market participants, this election is a much-anticipated event and is probably the epitome of speculations. Uncertainty around the election results, pillar to post chase up to seek consensus, pre-poll surveys, forecasts by numerous outfits and algorithm-based analysis build the hype. While we believe that this once in five-years festival celebrates our democracy, however, the investor frenzy surrounding the same seems overstretched and largely unwarranted as well. Already, many have started calculating possible outcomes and have stitched various market scenarios to it.
HISTORY CAN’T BE IGNORED
To prove these market scenarios historical data is being used. In this case it is the heightened market volatility seen in May 2004 and May 2009 Lok Sabha elections. In fact, there appears to be a coherent effort across to address only one dilemma “What would happen to markets in case of any negative outcome?” The answer to this question lies in past data itself. It is said that ‘History is not a burden on the memory but an illumination of the soul.’ So, to illuminate that part of our soul, which seeks investment knowledge, let us evaluate data over a period of 35 years of election period. This data set will help us prove our hypothesis that election related investment frenzy is unwarranted.
NUMBERS DON’T LIE
Except in 2004, historically unfavourable periods of negative returns during election period have largely been because of global events and resultant risk aversion. In ’97, it was the Asian Currency Crisis, Dotcom bubble in ‘01 and global financial crisis in ‘08. While we have had two extreme market reactions post elections in 2004 and 2009, overall performance trajectory eventually got normalised over medium to long term. Our ingrained concerns revolving around political uncertainty in view of potential fragmented mandate too appears misplaced. We have had fragmented mandates in past which led to short-lived governments between 1996-99.
However, over the past 30 years, irrespective of their own ideological and fundamental overview, most of the governments haven’t deviated or reversed the path of policy reforms. They along with their allies at regional level have resorted to expansionary fiscal policies despite conflicting interlinkages and differences at ground level.
GOVERNANCE IS NOT MERELY CENTRE, BUT STATES TOO
Another biased view is that the Central government and its stability is the only catalyst for governance in India. Noting could be further from the truth. The fact is that we tend to under estimate the strength of federal structure and its role in governance and policy making. Basis the size of the fiscal budgets and subjects assigned with states, the contribution of states and local bodies is nearly 60% to the overall governance. Thanks to the new-found competitive federalism, states are today competing in improving business environment and overall governance. Still, it is election time and there would be temptation to yield into some tips, certain win-win investment scenarios. It’s like playing Hardik Pandya as an all-rounder in the team. The team management belief is that he’ll excel in both batting or bowling or at least either of them but thanks to data we know that he hasn’t performed in either. The decision to play him rests with the cricket team management, however, at least we can make a prudent decision by introspecting our data.
IF YOU DON’T KNOW HOW DEEP THE RIVER IS, DON’T STEP IN
This African proverb probably sums it all. Invest as you have been investing – in a disciplined manner and based on good investment advice. Making investment decisions based on events like election is quite overstretched. If we look at the last 10 years, then global markets have witnessed many unexpected events like Global Financial Crisis, Euro Zone Crisis, Fed rate hike, Brexit etc. Yet, they have risen owing to ongoing synchronised economic growth and corporate earnings. Similarly, your wealth creation goals can be achieved through asset allocation and in-tuned portfolio construct with required ring fencing towards the potential risk.
MEDIUM TO LONG TERM OUTLOOK LOOK PROMISING
To summarize, long-term market performance is not an outcome of election frenzy. It depends on Government policies & its implementation and in our view, the structural reforms implemented over the past four years would provide enough impetus to attain healthy growth trajectory for a reasonably longer spell. Inflationary concerns appear to be cooling off lately, while crude oil price and currency movements could continue to be key catalysts. If we take into consideration combined spending of Centre and State governments on Infra, housing, investments and rural, then India looks to be well on course to revive demand and languishing corporate earnings. Hence, we continue to maintain positive outlook on equities. On valuations basis, large caps continue to be attractive for now. Ultimately, if the election result is not to the market’s liking, then we may see short-term selling and market underperformance. However, sound fundamentals and quality investments will drive portfolio outcomes leading to market performance in the longer term. So, enjoy the pre-election frenzy, have a laugh when the results are different from the exit polls, keep a tab on the changing political equation but remember that it’s just an event.
