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.
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