Elections do matter to market, but you can build a poll-proof portfolio
India has always been a bottoms-up market, regardless of noises around elections.
The stock market fluctuates to the flow of news related to not just the economy, but also politics and other events.
In India, the general elections decide what is in store on the political front for the next five years and foreign players generally prefer to invest in economies that have stable governments with strong policies with long-term visibility.
The rally we are witnessing in Indian stocks can be attributed to the optimism over expectation of Narendra Modi’s return as Prime Minister for another term. This optimism has kept foreign investors bullish on India and the market is benefitting from huge emerging market inflows.
To boot, India equities have witnessed foreign inflows worth a net of $6.7 billion during January-March, which is more than the outflows of $4.4 billion in 2018.
If history is to repeat itself, India has always been a bottoms-up market, regardless of noises around elections. Moreover, volatility is a part and parcel of stock market. Investing is a process of wealth creation and should not be influenced by any events. Investors should decide on portfolio allocation based on one’s risk profile and financial goals rather than various event-based return scenarios.
Investing in companies that have robust business models and are focused on demographics, for example consumption, are expected to deliver modest returns. There is a good number of companies from sectors like FMCG, IT, metals, refining and pharma exports, which keep on growing at higher rates irrespective of election cycles. These sectors are hardly impacted by any change of the government at the centre and demand for consumer products like packaged foods, electrical goods, digital services and medicines never falls.
Also, investing in companies that have high revenue growth in international markets can also provide the much-needed immunity to the portfolio in times of volatility.
Traditional investing wisdom asks not to put all your eggs in one basket. While building a long-term portfolio, one should ensure exposure to a combination of multiple asset classes. Investing for the long term can smoothen the impact of the ebbs and flows of the market and help investors garner good profit from their investments.
Also, past evidence suggests after reacting to election results, the market tends to move in tandem with earnings and economic fundamentals. As the fundamentals of the Indian economy are solid and there are expectations of an earnings recovery, the market is expected continue its upward movement. One may look at stocks like ICICI Bank, Reliance Industries, HCL, Tech Mahindra, ITC and Indian Bank to build a long-term portfolio.
(DK Aggarwal is Chairman & Managing Director of SMC Investments & Advisors)