Expert view: Unexpected election outcome could disrupt Indian stock market

Edited excerpts:

How do you expect the election outcome to impact market sentiment? How could the market react if the outcome is not on expected lines? 

The results of the 2024 general election are unlikely to greatly influence the stock market in the short run, although the long-term impact could be significant. 

Thematic-based investments have taken the forefront with the government and most fund managers advising on a broader bet than individual stock picking. 

The recent bull market has largely been driven by confidence that the incumbent party will remain in power, along with the phenomenon of election rallies. 

Election years are usually good for financial markets, with the past four general elections showing double-digit returns. 

Adding to that, much of these gains, predominately in the small and mid-cap stocks, might already be factored in ahead of the current election, indicating that the market’s potential for further gains may be limited as the election outcome draws closer. 

Further, the large-cap stocks have seen muted or moderate returns and may see some movement after the elections with political certainty for the next five years. 

However, if the election outcome is unexpected, it could cause market disruptions, as seen in previous instances. 

Still, these are likely to be short-lived, with recovery expected once the election fever is erased and normalcy is resumed.

Also Read: Expert view: Indian stock market inherently strong to sustain gains; look beyond immediate triggers

Should a market correction occur, is there a possibility of it exceeding 5 per cent?

The Indian stock market has experienced six corrections over the past two years, which can be attributed to the geopolitical conflicts in Russia-Ukraine and the Middle East that have significantly impacted global oil and gold prices. 

Recently, India has witnessed a maximum daily decline of 2-3 per cent, which is relatively modest compared to the substantial 30 per cent drop observed during the financial crises of 2008 and 2020. 

These events originated outside India, suggesting that the Indian markets have historically reacted to external factors rather than being at the epicentre of these major upheavals. 

In the context of India’s rapid economic growth phase, a 5 per cent single-day decline in the market would be considered significant. 

However, given the resilience displayed by the Indian markets thus far, a correction of such magnitude on any given day is not anticipated. 

At present, high valuations are observed in small and mid-cap stocks, which are susceptible to a sudden correction. 

Unchanged Fed rates favour the Indian markets, but FDI has already dropped by 21 per cent in the current financial year. 

The Indian stock market has seen a great rally, signifying the robustness of the retail investors and the DIIs. 

What sectors should we buy for the next one to two years?

Every industry has times when favourable conditions allow the market to rise to previously unheard-of heights. 

Remember the early 2000s IT boom or the Covid-19 pandemic-induced healthcare sector boom? 

India is among the few nations worldwide that continue to see rapid GDP growth in the presence of numerous favourable conditions. 

Industries such as pharmaceuticals, electronics manufacturing, and infrastructure are anticipated to see robust growth. 

We also have our eyes on the electric vehicle (EV) market, which is expected to be a lucrative area to invest in, in the coming years. 

With the growing environmental awareness among the younger generations, renewable energy and recycling as a theme are picking up steam. 

Additionally, government initiatives, such as tax benefits, subsidies, and promotions, could make these sectors even more attractive. 

What are the biggest challenges for the market in the short to medium term? 

Right now, geopolitical situations are the main points of debate. 

Global instability like this can put the security of commodities and trade at risk, which, you know, could pose a threat to the market in the short-to-medium term. 

Other issues to be concerned about are changes in the nation’s political climate, inflation, the growing cost of living, and the rupee volatility. 

Speaking of politics, the general election is already in progress, and election-related optimism and the expectation of a stable government have historically resulted in strong market performance. 

Long-term bull markets occasionally experience periods of consolidation or corrections. 

So, I am a bit more cautious; for the short term; I continue to be bullish for the medium term.

Also Read: 3 key reasons why RBI will not cut rates this year: Elara Capital

Why should retail investors think about investing in bonds? How should we play the debt-equity combination?

Retail investors should not neglect bonds. They provide stability and income within a diversified portfolio. 

SEBI’s recent reduction of the face value of corporate bonds to 10,000 further enhances their accessibility. 

Factors like returns, taxes, and credit risk are crucial when considering bonds. However, a strategic mix of equities and bonds is ideal for long-term wealth building, offering growth potential and stability. 

Remember, bonds balance risk and return, making them suitable for newcomers to the market. 

The current environment is particularly interesting for bonds. Not only can they offer steady interest income, but there is potential for capital appreciation in the next 12-18 months due to the enhanced liquidity available. 

This makes them a compelling option, especially for investors in lower tax brackets. However, remember, bonds aren’t a one-size-fits-all solution. 

Debt funds might be a better fit if stability is your top priority. 

They offer professional management and diversification within the fixed-income space. 

Ultimately, the debt-equity mix depends on your risk tolerance. 

Stocks offer higher potential returns but with greater volatility. Bonds provide a steadier ride with lower potential gains.

Also Read: Indian investors should think about bond investments, say experts; here’s why

Asset allocation is crucial for minimising losses and maximising gains. What is an ideal portfolio, in your view?

Asset allocation is the foundation of diversification. I believe that a multi-asset approach works best. 

It involves dividing your investable corpus across asset classes like equity (stocks), gold, fixed income (bonds), and real estate. 

The ideal allocation depends on your risk tolerance, investment horizon, and financial goals. 

A young investor with a high-risk tolerance might allocate a larger portion to equities, while someone nearing retirement might prioritise the stability of bonds. 

The recent market rally is encouraging, but what is surprising is to see gold also witness a significant rally simultaneously. 

It has outshined all other asset classes and continues to show good performance. Its resilience throughout the volatility is a testament to its role as a hedge.

Diversification is key to mitigating risk and capitalising on opportunities across different asset classes. Re-balancing is necessary to maintain the portfolio’s overall risk profile. 

In my opinion, an ideal portfolio mix, given my age and current earnings, would constitute 75 per cent of equity markets (individual stocks and mutual funds), 10 per cent in SGBs, 10 per cent in real estate (fragmented ownership models), and 5 per cent in fixed income products.

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Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.

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Published: 08 May 2024, 04:59 PM IST

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