Even as market pundits try to decode the impact of elections on the Sensex and Nifty, with just nine months to go for the all important general elections, a recent report finds that investing in Nifty large cap stocks may be the best strategy. Kurtosis Analytics and Advisors has come out with a report analysing the Sensex returns in the nine months leading up to the elections in the last 10 occasions.
The analysis was carried out for 10 Lok Sabha elections since 1980. Notably, the Average 9 month return for Sensex prior to election result over the past 10 Lok Sabha elections is 13.52%, noted the report. “Out of the 10 Lok Sabha elections sampled, Sensex gave a positive return on 7 instances whereas on 2 occasions returns were negative. A flat return (marginally positive) was observed on one occasion,” the report noted. Interestingly, the returns were irrespective of which government comes into power. “The Sensex moved up in the 7 instances irrespective of who came to power. The indices do not have any political bias,” K Anant Rao of Kurtosis Analytics and Advisors told FE Online.
Last time around, in the nine months prior to PM Narendra Modi coming to power, the Sensex had returned 31.76%. Notably, in 2009, in the nine months prior to Manmohan Singh’s victory, the 30-share index had returned 7.23%. The corresponding return in his earlier UPA 1 regime was 22.63%. Interestingly, the nine months prior to Atal Bihari Vajpayee’s election in 1999 yielded the highest of 48.1%. Negative returns of 1.61% and 3.16% were observed in the nine months prior to Atal Bihari Vajpayee’s election in 1998, and Indira Gandhi’s win in 1980 respectively. So, what is the takeaway for investors?
“Replicating the Index would be an easy way out but there are considerations such as fat tail risk involved along with the fact that 80% of the index weightage lies with the 31 out of 50 stocks in Nifty Index. Thereby, its better to keep the portfolio concentrated in 10 stocks of the index which have a high probability to generate alpha over the next 3 quarters and achieve diversification via sector balancing and equal capital allocation,” noted the report. Notably, we are just nine months away from the formation of 17th Lok Sabha. This 9 month period prior to election has proven fruitful for investing in large caps on 8 out 10 previous elections since 1980.
Explaining why it may be a good strategy to pick up large cap stocks now, the report said that at present, Nifty/Sensex are trading at a new all time high but the recent correction in the first half saw decimation of value and valuation at the end portfolio level and we are yet to see recovery. “The market sentiment is not very buoyant due to this and therefore risk aversion is slowly creeping in as participants are looking to exit mid and small cap stocks from the portfolios as and when prices recover to their purchase price,” the report noted.