Post Election Result analysis

By Sanjeev Govila Blog Mutual funds, Post Election Result analysis

Lotus has Bloomed!! Will you again get late to catch the bus?

The Indian equity markets welcomed the change in Government at the centre as they cheered and went over 1,000 points (or +4.0%) in early hours of Friday’s trade on 16 May 2014 when result announcement was in progress. However, since the outcome of the election was much in line with expectations, they gave off some gains due to profit booking by the day-end, since most run-up had already taken place in the recent past. One major difference between this election and previous ones is that market volatility has been much lower so far than during past elections. In the 2009 elections, the Indian stock markets rose 17% in the two days following the results. In the 2004 elections, the Indian stock markets fell 17% in the two days following the results.

On the election-results eve (on the night of 15 May 2014), we had sent you a mail which talked of 3 election scenarios. The First Scenario given out was as below, which has eventually played out:

“The exit polls are wrong and Modi and team will win over 320 seats: the market could:

surge by another 10% in one day; so the S&P BSE-30 Index may cross 25,000,
then there will be a pause to see who will be in the cabinet,
then there will be a reaction to the new policies and budget which will be announced by the end of June,
if the budget is good, then the Index may stay in the 25,000 to 27,000 range but if the budget or policies are seen to be like those crafted by President Pranab Mukherjee when he was Finance Minister in 2012, look for an Index closer to 18,000!!”

So, What do we Say now?

We have been cautious so far all through in the past four years. We told you to get into equity through the safer route of SIPs in your equity diversified mutual funds since ultimately slow-and-steady wins the race. We told you to take fair exposure to safer debt mutual funds if you were keen on tax-efficient safe returns. We also said that you should have patience since the country’s macro-economic condition was not getting any better – hence, not to expect any miracles with your financial investments.

We are about to change all that we said so far! Please read the following carefully which articulates our changed views now:-

Indian stock markets are now on the cusp of a bull run and in a true Sweet Spot. If the new Govt utilises its new-found mandate correctly, the current situation may be better than even the 2004-2007 golden run of the stock markets. Remember, Narender Modi said words to the effect during his election campaign that Rajiv Gandhi wasted the great mandate given to him in 2004 and should never be forgiven for that by the people of India. Even today, in spite of past weak market years, the past 1 year, 3 years, 5 years and 10 year returns have been fantastic for the patient investors and better than any other asset class, including real estate.
Markets have run up but are not high. On a P/E ratio of 18 today, markets are only rightly priced. The speed and certainty of decision making of a majority Govt are still not factored in the market numbers. If Govt starts out with some good policy announcements, potential is immense. Most of the retail investors are under-allocated to equity now. They need to utilise this opportunity and enter now rather than when all the biggies of the markets have already entered at lower level, as typically happens in any bull run.
In the whole world, India is in the best position to grow. The US, Europe, China and other emerging economies are beset with serious internal and external problems. Hence, commodity boom, which could offset most of the progress that we make, is not likely to happen. Our problem so far was that we were our own worst enemy. If governance improves, we should be off the starting block.
On the currency side, Rupee is itching to strengthen below 58 to a US Dollar. However, as the economy strengthens, RBI would like to buy $ to reach its forex reserves target of US$ 400 bn. Thus, we expect Rupee to move in a narrow 58-60 range. This RBI intervention is likely to provide the much needed liquidity to the system, along with the expected FII inflows. As uncertainty on liquidity disappears, interest rates may move down.
The WPI is 5% while CPI is at 9.5% right now averaging over past two years. We expect WPI not to go below 4.5% but the CPI may move down to about 5-6% in next two years. This implies a softening of interest rates, making long-term allocation to debt mutual funds very attractive.
Any Black Swan events that can upset the apple cart? El Nino (bad monsoons), deteriorating of fiscal deficit by more than 0.5% below the current 4.2%. With good governance, they should be passing blips. Fiscal deficit should get controlled to 3.5% range in next 2-3 years. Of course there are risks to any prediction, but the current risk-return analysis rules in favour of going ahead. Index at 30,000 is possible if GDP gets into the 6-6.5% range – currently it is in the 4.9% range.

So what do we advocate for YOU now:-

If your risk aptitude allows, this is a good time to enter the markets, preferably through the mutual funds route rather than direct equity. Get into mid caps, diversified multi-caps etc. If for some reasons markets go down temporarily, use it as a good opportunity to accumulate more, rather than doubt your decision of entering the markets. See the fantastic returns our investors are currently sitting on, who continued with their SIPs through the past lean years. If you are already in the markets, allocate more.
Have a long-term view rather than be in-and-out of the market on your short term predictions and fears. We are likely to see a structural change in Indian economy and it will take time to play out fully. Patience will get rewarded. Impatience can get punished even in a structural bull market. Markets will never move up in a straight line. Link your investments to your long-term goals to stay the course.
If you do not have the risk appetite for equity, go for long term debt mutual funds. As the interest rates move down, you will create far better and tax-efficient wealth than if you invest in bank FDs, post office products, insurance policies, etc.
Have the mindset of a millionaire – save more, have patience with wealth creation, set an agenda and don’t get out of your investments till the goal is achieved. Remember, millionaires follow the equation: Earnings – Savings = Expenditure, and not the equation: Earnings – Expenditure = Savings. Set targets to Savings and not to expenses first.

How can we help you do this?

Write to us at contactus@humfauji.in or contact us on 9999 022 033. Our professional, ethical and efficient service is available to you. We will make your portfolio, review your existing portfolio, invest it in your name and monitor it on a quarterly basis for a small yearly fee. A dedicated financial planner will be available to you to sort out any issues and answer your related queries. We aim to be a one-stop-financial-solutions-destination for you: equity and debt mutual funds, life-time financial planning, retirement planning, children’s planning, income tax filing, corporate FDs, Govt bonds and much more.
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