Should election outcomes influence your investment decisions?
To answer this, first we need to check if election outcomes really alter the course of stock markets.
There may be some short-term volatility based on the noise around election time, however, economic fundamentals and corporate earnings growth drive the markets eventually.
There is evidence to suggest that election outcomes do not fundamentally alter the stock market trends.
If you go by the last 4 elections and check the 6 months Sensex performance pre & post elections there is no clear pattern that is visible that can form a basis for investment decision making.
The longer-term Sensex performance for those years, when these governments remained in power post each of the last 4 elections actually shows a direct correlation to earnings growth as shown below.
Further, for the 20-year period across the last 4 governments, the Sensex has returned about 11 percent CAGR and the EPS growth in the same period has been close to 10 percent p.a.
While equity market may at times run ahead of fundamentals (overvalued) or fall behind fundamentals (undervalued) based on sentiment and forward-looking expectations, the actual returns are in line with earnings over the long term.
It is important to stick to your investment objectives and risk-profile based asset allocation across different asset classes to derive the best outcome from your investments.
On the equity front, we believe that the Indian economy is on the cusp of earnings revival led by banks as NBFCs are facing headwinds post the recent liquidity episode.
Also, investments should revive post the elections and further support growth & earnings. While Consumption has slowed in the near term, low inflation should lead to easy monetary policy which in turn can boost consumption.
On the global front, while growth has slowed, the easing stance of the US Fed and positive feelers on US-China dispute resolution could support the markets.
We maintain our stance of being overweight on equities with a bias towards largecap stocks. At the same time, we expect midcap and smallcap stocks are due for a revival post the substantial price corrections in recent times.
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Source: Moneycontrol
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