With a majority government at the Centre, investors may increase their equity exposure in a phased manner.
With the Narendra Modi-led NDA getting the largest mandate as an incumbent government since 1984, the stock markets will view the return positively and expect the government to announce a spate of economic reform initiatives over the next few months.
After hitting record-highs on May 23 on news of the BJP-led NDA’s return for the second five-year term with a thumping majority, the Sensex lost all gains with the benchmark closing lower by close to 300 points. Nifty was down by 80 points at 11,657. In technical terms, experts will call it ‘sell on news’ as the final outcome was more or less in line with exit polls.
Long-term political stability
For equity investors, the thumping majority means political stability. Dhiraj Relli, MD & CEO, HDFC Securities, says investors now have political stability and predictability of economic policies which they normally look forward to before investing with a long-term time horizon. “India’s economy has typically accelerated after formation of new governments with some energised policy making, greater predictability and higher corporate risk appetite. This augurs well for the the country as there is going to be a continuity in policies,” he underlines.
Ideally, equity investors should not worry too much about about peaks and troughs as they are normal for a healthy market. Experts say with a majority government at the Centre, the Indian stock markets will continue moving upwards to give you an average 12-14% per annum growth. However, in the short-run, poor company earnings, expensive valuations and other macro stresses can pull down the markets.
Invest regularly through SIPs
Vijay Kuppa, co-founder, Orowealth, says the Modi government’s return with a historic mandate may see the 50-share Nifty touch 12,500. “This rally should be used to reduce any excess equity exposure that one may have in your portfolio. Hence, don’t be very aggressive in buying at present levels. Stick to your existing financial plans and Systematic Investment Plans (SIPs). You will get an opportunity to buy more aggressively sometime in the near future,” he says.
Equity as an asset class has the potential to deliver best performance over the long term. There is ample evidence that long-term investors are expected to earn impressive returns, irrespective of geopolitical or domestic events. Relli says that investors may evaluate increasing their equity exposure in a phased manner if the current equity allocation is less than the desired exposure. “And if they are bogged down by the spate of negative news on the domestic or global front, they have a great instrument in the form of SIP. For investors who don’t have the time or ability to shortlist good stocks, starting a DIY SIP in Nifty ETF or Nifty Next 50 ETF or Nifty Bank ETF makes a whole lot of sense,” he says.
Despite volatility, this year has seen a trend of strong SIP flows into mutual funds. Discretionary or lump sum investments in mutual funds have seen a dip as such investments are a function of market performance and relative attraction of other alternatives. An analysis by Elara Capital show that a majority (40%) of mutual fund investments originate from Maharashtra (primarily Mumbai) and NCR.
“With both these markets facing a challenging real estate environment, we expect SIP flows into domestic mutual funds to sustain. Also, given the anticipated cut in rates, equity will gain attraction ahead of fixed income avenues and with demand environment in real estate not looking profitable in the near term, we expect the financialisation trend and channelisation of money into equities to strengthen,” says the note to clients.
The Indian stock market has gone through a rough phase since the beginning of 2018 because of weak rural demand, slowdown in investment and impact of relatively higher borrowing costs. The fall in the investment rate has driven down corporate margins. Now, the market hopes for economic reforms in factor productivity and investments which will drive growth and the broader markets to rally, which will boost retail investors’ confidence in the equity markets.