We are nearly at the end of polling for general elections and as expected we are witnessing enhanced volatility in the stock market.
- By Arun Thukral
We are nearly at the end of polling for general elections and as expected we are witnessing enhanced volatility in the stock market. The market has rallied to all-time high last month factoring expectations of current government continuity at the centre before correcting lately on account of the global risk aversion. As the D-day for counting approaches the volatility in the markets is expected to build up and we expect it to be very high between the end of the 7th phase and the counting day as the exit poll results would throw all types of possibilities from stable, one party led government to fractured verdict. The uncertainty about the outcome of elections has brought sudden fear among the investor community regarding the market movements and the possible impact of the election outcome on their investment.
This brings one to a pertinent question of how should an investor grapple with this market volatility and position himself in such trying times. To answer this question we should understand the underlying factors affecting the stock market that can be broadly classified into the non-fundamental factors and the fundamental factors. Events and news can be classified as non-fundamental factors that affect sentiments of the market for the short term while having no substantial impact on the fundamentals of the stock. Election outcome would be one time ‘high decibel event’ with the short term volatility. Elections are part of a democratic country and fall due every five years.
This is one of the most talked about event, so anticipations around it would keep enhancing volatility in the market. While a stable government i.e., government formed with the majority would set the market sentiment right straight away, a coalition government would indicate further uncertainty and the markets may witness extended volatility. Here investors should be aware of the behavioral aspects that tempt them to time the market and avoid the risk associated with it. Instead of investing in lump-sum, the investor should opt for SIP route to invest in a staggered manner.
Fundamental factors are economic strength (inflation, interest rate, and investments), growth expectations, policies, earnings of the company, etc. On a broader level, India’s economic strength and growth story remain intact. India’s GDP ($2.5 trillion now) is expected to double in the next decade. The market capitalization of equity markets is generally 80-90 percent of the GDP and corporate earnings are expected to do well as consumption led demand picks up. So, as the GDP grows, the equity markets are expected to ride the growth irrespective of political party ruling the government, though uncertainty would exist in terms of a difference in policy adoption if the regime change happens as the poll verdict is announced.
This would result in short to medium term impact on the markets; however, in the long run, it would be necessary for the government to take care of all the aspects of economic growth. One must diversify the portfolio across sectors and stocks to limit the downside from a difference in policies by ruling party post-election result. While broader index would continue to support individual stocks to perform well, it is advisable to make efforts in screening sectors and stocks to invest in a fundamentally strong business. Identify stocks with growing earnings, strong balance sheet and visionary management that display superior corporate governance.
With long term growth story in place, investors should make their portfolio allocation based on their risk profile and financial goals rather than focusing on events including elections. It is opportune time to invest in equities and hold tight to fundamentally strong stocks to ride the growth wave and create wealth over a long period horizon. Volatility in the market is inevitable that keeps investors on their toe. Diversification of portfolio, discipline in stock selection and staggered approach to investing remains the key to help you hold tight amidst short term market turbulence including elections.
(The author is Arun Thukral, MD & CEO at Axis Securities. The views expressed are author’s own)