An election year is usually perceived to be a year of enhanced volatility for equity markets. Investors may get swayed by projections of possible election outcomes and may also be tempted to time the market.
However, it is important for long-term investors to decide on portfolio allocation based on one’s risk profile and financial goals rather than various event-based return scenarios.
Given our democratic nature, elections are a continuous process. General elections fall due every five years and they have brought in various political dispensations, including coalitions and majority governments.
But how of does election politics matter to market? Let’s look at Sensex returns during different Prime Ministers.
As is evident, equity returns do not show any significant divergence from the long-term positive trend of wealth creation across different prime ministers.
Let us now evaluate the impact general elections based on returns during pre- and post- election periods.
It is interesting to note that in last six elections, most of the time the market did not show any significant divergence from the trend seen during the pre-election phase despite surprises in poll outcomes.
For long-term investors, it is important to evaluate returns as per investing horizon instead of staying fixated to short-term events or time horizons.
Let us analyse returns for various time horizons:
Sensex CAGR return of 16 per cent over a 10-year time horizon proves that equity as an asset class has the potential to deliver best performance in the long term. A return analysis across various time horizons and market capitalisations corroborates the age-old portfolio theory that spending more time in equity market is far more important rather than trying to time the market.
Historical returns not only prove the unravelling of India’s long-term growth story, but also provides ample evidence that irrespective of geopolitical or domestic events, long-term investors are expected to earn impressive returns.
As for potential investment avenues in 2019, it is an opportune time for investors to evaluate increasing their equity exposure if current equity allocation is less than the desired exposure. In most cases, stock valuations are reasonable even though the indices have scaled peak valuations in recent weeks.
Specific to 2019 investment avenues, it is an opportune time for investors to evaluate increasing equity exposure if the current equity allocation is less than the desired level.
In view of the recent correction from historic highs, valuations are reasonable. BSE Sensex now trades at a forward P/E of 18.6 vis-à-vis a five-year average of 16.7 and BSE Midcap trades at a forward P/E of 19.1 vis-à-vis a five-year average of 19.0. Retail investors should adopt a staggered approach (spread over next six months) to increase equity exposure. Given the risk profile and the steep correction, one may find pockets of opportunity in midcaps and smallcaps. Investors with long-term view could also evaluate quality midcap and smallcap mutual funds as well.
As for debt market, while muted headline inflation, stable external account dynamics, dovish bias of key global central banks and continued OMOs by RBI are positives, high gross market borrowing and concerns about fiscal deficit continue to be of key concerns for bond investors.
Given the recent volatility, investors may prefer low duration and ultra-short-term bonds. This strategy can help minimise interest rate risk and volatility. We also urge investors to be cautious about credit quality and always prefer high credit quality portfolios.
The Indian economy is poised at a pivotal stage. Several structural reforms such as GST implementation, insolvency laws, increase in direct tax base and increase in formalisation and digitation of Indian economy are likely to accrue benefits in 2019 and beyond. Increasingly, there is a consensus around various economic policies across political parties and structural factors should ensure sustained growth in economy and capital markets over the medium term.
From an asset allocation strategy perspective, the maxim of ‘Patience is a Virtue’ is cardinal. Historically, there has always been periods of relative outperformance between various asset classes.
Hence, chasing returns across asset classes always pays off. While building a long-term portfolio, one should ensure a combination of multiple asset classes and product diversity within each asset class. The allocation of weightage for each asset class should be a function of one’s risk appetite, time horizon and long-term financial goals.