The Indian market has been exceptionally volatile in the month of May. After falling over 3 percent in the first half, it rebounded a bit and is now down around 0.4 percent this month. The volatility has been attributed to some concerns surrounding the election results as well as the continued foreign investor outflows.
In a recent note, Kotak Alternate Asset Managers Ltd (Kotak) pointed out that as the election results near, the VIX index, a measure of market fear, has spiked to a one-year high of 19 from around 11 a month ago.
“This is reminiscent of May 2019, when the VIX peaked at 29 during the election month amid expectations of anti-incumbency, only for the BJP to win a surprising 303 seats following the Pulwama incident. The current anxiety ahead of the elections is natural, especially given the market’s recent one-sided optimism. This spike in volatility may lead to wild swings and force some traders to reduce exposure to risky positions with leverage, a necessary and healthy shakeup to eliminate excessive market froth,” it cautioned.
However, the key question Kotak raised was what should investors do? What if the BJP doesn’t get a full majority of 272 seats, or the NDA forms a government without Modi? In the worst case, the NDA could lose, or on the other extreme, they could actually achieve “400 par”. It noted that all sorts of permutations and combinations are possible, and it would be naive to even try to predict the outcome. Experience suggests these predictions are often wrong, as voters in the world’s most diverse country cast their ballots with many considerations in mind.
Suggesting a market strategy ahead of poll outcome, Kotak has maintained a status quo with a neutral equity allocation, with a 75:25 allocation to large-cap and mid-cap stocks. It recommends investors cut leverage and rotate portfolios towards defensive sectors.
Read here: Elections 2024 & Stock Markets: ‘Stop predicting, start…’ says Deepak Shenoy
“In our view, a large part of the optimism is already priced in, while disappointment is not. Therefore, the risk-reward is skewed slightly towards a buy-on-dip strategy, rather than going all in,” it said.
Overall, it continues to believe the Indian equity market will deliver low double-digit returns in the current financial year after the positive performance YTD.
Here’s a look at its current market strategy –
View Full Image
Sectors
In terms of the sectors, Kotak has cut its negative view on IT. It believes the sector valuation now correctly reflects the ongoing challenges and that near-term outperformance is possible.
“The IT sector valuation has become more attractive. However, a sustained rally is less likely as the sector dynamics remain challenging and the recovery in operating performance is still some time away,” it said. Kotak continues to prefer pharma over IT.
On the other hand, it stated that the recent commentary from the FMCG and two-wheeler companies has been positive with a view that the rural demand is picking up. After significant consolidation and underperformance, it expects these sectors to remain in favor due to their defensive nature and attractive dividends.
It further expects the metals and mining sector to continue to benefit from accelerating domestic growth, while Chinese macro data has begun to stabilise. Gold and silver look interesting even after the recent rally, given geopolitical risks.
Within financials, Kotak remains constructive; however, the outlook has been weakening mainly due to increased regulatory scrutiny. Hence, it recommends trimming positions, especially in some PSU banks. The sector is experiencing regulatory policy tightening, which may hurt valuations. The recent draft regulation by the RBI on project financing, if implemented, could also hurt infra and capital goods companies, as per the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it’s all here, just a click away! Login Now!
Download The Mint News App to get Daily Market Updates.
Published: 21 May 2024, 01:05 PM IST
