Stay invested, but don’t go overboard

Exit polls indicate the return of NDA to power. Even though exit polls don’t have an accurate track record and can go terribly wrong at times, a reversal of the general trend indicated, preventing the return of NDA to power, appears improbable. A strong and stable government with stability in policy is good from the market perspective. The stock market will discount the exit polls and open gap up. The rally in the market is likely to be led by financials and rate sensitives. The beaten up stocks in the auto space and select mid and small-caps also might do well.

Political stability will usher in a feel good factor and renewed optimism facilitating increasing flows into the market. This would hold the market in good stead and investors have every reason to rejoice.  But this is not the time to go overboard. The rally in the market is unlikely to sustain beyond a point because there are many headwinds. Globally, the threat of a slowdown and the trade skirmishes between US and China aggravating into a trade war, are serious concerns. There is bad news on Brexit. Domestically there is a real slowdown in the economy and some segments like autos are facing serious demand deficiency. The NBFC crisis and the liquidity squeeze are serious issues. The earnings of the broader market will take time to recover. Beyond a point valuations will become difficult to justify. It is likely that all the good news will be in the price by 23rd. Beyond that, the Indian market too will step in tune with the global trends. So watch out for the global trends.

One ground for optimism is that a strong and stable government can address the domestic concerns. The renewed mandate will empower the government to address issues and implement the much-needed reforms with confidence. A period of strong policy initiatives including further rate cuts is in the offing. This augurs well for the market.

Investors are advised to remain invested. Quality stocks with earnings visibility will do well. So stick to quality. Many beaten down stocks in the mid and small-cap space will bounce back but investors should exercise great care in choosing them. Low-grade stocks in this category should be avoided. Better option would be to invest in mid and small-cap mutual funds.

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Posted on 20 May 2019