And history repeats itself…

In early march, we had highlighted historical behavior of the stock market. We had also highlighted how important it is to track reaction of markets to the events occurring at periodic intervals. Events trigger the momentum in equity markets. Moreover, one such major event that India is tracking currently is ‘election 2014’. We had briefed you in our last article (given below again for your reference) on how the markets move up or down in line with consensus on future results from an anticipated event.


As consensus on the probability of a favorable election outcome is building, the markets are improving their position with every passing day. As per our back testing on markets, they have shown a positive tendency to events such as elections 2014. As per our expectations, markets have moved up considerably. Further, they are looking strong enough to deliver above average returns, going ahead.

 

During our article dated March 6, 2014, the NSE Nifty 50 had recorded a low of 6340 with moderate trail P/E levels of ~18. As of today, Nifty is trading above 6700 with trail P/E levels ofaround 18.85. The P/E level is almost up by 1 point from the lows of Mar ’14, but it is still quoting at moderate levels just below 19.

 

Markets have moved up positively, as indicated by us in last one month. NSE Nifty 50 index delivered 5.7% absolute returns in just 1 month, marking a remarkable performance by equities. Nifty 50 has given average absolute returns of 1.3% in the last one month on a daily basis. Echoing the same performance, mutual funds have also delivered above average returns and even some top funds beating Nifty returns in the last month.

 

The positive momentum could be due to anticipation of an event, which is expected to deliver a positive environment. However, other factors that have also started supporting this momentum such as lower inflation, strong global markets, and expected downward movement in interest rates cannot be kept on the sidelines.

 

Performance of Nifty 50 – Since our article

Date

High

Low

Turnover

Returns %

(Cr)

06-Mar-14

6407

6340

5845

07-Mar-14

6538

6414

11368

3.1

10-Mar-14

6562

6487

9993

2.3

11-Mar-14

6563

6494

8269

1.2

12-Mar-14

6546

6487

6177

0.8

13-Mar-14

6561

6477

8356

1.1

14-Mar-14

6518

6433

7115

0.6

18-Mar-14

6575

6498

7269

2.2

19-Mar-14

6541

6506

7666

0.7

20-Mar-14

6524

6473

6281

0.3

21-Mar-14

6523

6486

8842

0.8

22-Mar-14

6503

6481

374

0.3

24-Mar-14

6592

6511

6634

1.7

25-Mar-14

6596

6545

6476

1.3

26-Mar-14

6627

6581

7046

1.3

27-Mar-14

6674

6600

12924

1.4

28-Mar-14

6703

6644

6863

1.6

6703

6340

Average 17 Days

7500

5.7

17 Days

1.3

 

Despite the positive momentum, market (Nifty 50 index) is quoting at moderate trail P/E levels of 19, which creates ample scope for above average returns in coming months.

Thus, we can conclude that as per our early March article, history has repeated itself with a combination of an anticipated event-based trigger and the build-up of positive economic environment leading to positive momentum, which is expected to continue, backed by descent fundamentals. As advised earlier, investors could continue to hold above average allocation to equities and gain from the positive economic environment, as history continues to repeat itself.

 

Happy Investing

Manish Tawde
Product Research & Financial Planning

 

 

 

——— Our previous article for the reference ———–

 

Will history repeat itself?

Events trigger the momentum in equity markets. Any big event such as budget or RBI policy could make or break the stock market. You may gain or lose on your investments post such events. One such upcoming event is the Elections 2014.

 

Equity markets work on expectations and it could turn out to be positive or negative. Markets try to position themselves as per the general consensus and at times, much before an actual event. They try to achieve valuations in relation to future expectations. Currently, the expectation is built on the formation of a new government in India and whether it will be a stable government.

 

Coalition governments in the last few years have proved to be unstable. It has been long since we have seen a government with a comfortable majority, without any post election tie-ups. The Indian equity markets still depend largely on FIIs and for this reason; stability of a government is one of the most important factors.

 

Therefore, it is crucial that India gets a stable government and one with a full majority. Unfortunately, the country is divided on regional levels with no clear choice of a single party. For example, people in the North and the West have similar opinions, owing to the fact that Hindi is a common language there and is understood very well. However, regional languages are prevalent in the South and the East and so the people have preference to regional parties. These regional parties give support to the government, but at times, they withdraw their support, which poses a threat to a stable government at the national level.

 

In this time though, there is hope that we will have a government with a full majority. This positive expectation in the election outcome has boosted the markets, which have registered all-time highs. As we write this article, the Nifty is trading well above its all-time high. Although this is a pre-election rally, it is also well supported by strong global markets and overall positive sentiments on the economy compared with the previous year.

 

On the valuations front, most of the market participants feel that markets are moderately valued. With slightly better results in the last quarter, the NSE Nifty trail P/E is still trading between 18 – 19 levels. These could be considered as moderate levels for investments with enough room to move up in case of positive news flow and further improvement in the economy.

 

Historically, the rally in equity markets is seen during election time in anticipation of a stable government, which is not impossible for India to achieve this time around. Considering descent valuation of equity markets with stable consumption, strong global markets, and expectations of a stable government, we could expect the markets to deliver above average returns compared with other traditional investment products.

 

We hope that history would repeat itself to deliver better returns pre and post election, if the expectations are met. Investors may have a 70% – 80% allocation to good quality equities to gain from moving markets.

 

Follow our ideal Equity SIP Portfolio as per your risk profile or talk to our experts to make your investment portfolio more effective.

 

Happy investing!!!

Manish Tawde
Product Research & Financial Planning

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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