Planning to invest before elections or hold it back?

The corridors of power in Delhi are buzzing with grapevine of a possible advancement of general elections to this yearend as against its scheduled time in mid-2019, when the current National Democratic Alliance (NDA) government led by Prime Minister Narendra Modi will complete its five-year term.

Recently, O P Rawat, Chief Election Commissioner, stated that the Election Commission is capable of holding Lok Sabha polls in December, along with assembly elections in Madhya Pradesh, Rajasthan, Chhattisgarh and Mizoram. However, “BJP’s track record in advancing elections is not good. Historically, it has gone against them,” says Arun Kejriwal, Founder, Mumbai-based advisory firm Kejriwal Research. Riding high on the India Shining campaign, the Atal Bihari Vajpayee-led NDA had advanced the elections by six  months in 2004, which did not work to their advantage.

Further, it is being strongly debated how early polls would impact the markets and the economy, which will adversely affect individual investors. Economist Arun Kumar argues that the Indian economy is not in good shape and the numbers projected by the successive governments are completely misleading. The governments have been consistently showing corporate data, which is growing at six or seven per cent, to mark their quarterly growth, but the unorganised sector is lagging by five to six years. He also points out that slow credit off-take and sluggish investment climate are not good signs for early elections. “Individual investment pattern might not change. Though deposits in banks are not rising, there is a sharp rise in mutual fund investment, which is directly impacting the stock market,” Kumar says adding, “But small-cap and mid-cap have done badly and that might impact individuals’ investment decisions if elections are held early.”

So if stock markets get impacted further, he predicts, individual investors might go for gold or change their investment portfolio or even hold back plans. But Sumit Bilgaiyan, Founder at Equity99, feels, “The sentiments have changed and I don’t think early elections will greatly impact gold. However, yields might fall in the debt market and the equity market is expected to remain volatile for sometime.”

Pronab Sen, statistician and Programme Director, International Growth Centre, points that if one goes by history, elections generally have an expansionary effect on the economy. There is a sudden spurt in expenditure and total purchasing power goes up, it usually has a positive impact on individual’s financial plans. Countering that thought, however, Prateek Jain, Director, Hem Securities, says, “An early elections can bring uncertainty which is disliked by the markets.”

While economic growth initially surged after NDA’s victory in 2014, it took a hit after the Prime Minister banned 86 per cent of the country’s currency on November 8, 2016, in a bid to stamp out unaccounted wealth. As we are at the fag-end of NDA government’s five-year tenure - “There is an uncertainty. If the ruling BJP falls short of a full majority, there will be a sense of panic amongst the investors as the newly elected Prime Minister might not be able to push hard for tough reform in a coalition government,” points Prateek. Kejriwal went a step further. He says, if simultaneous elections are held, then non-performance or anti-incumbency factors of the state governments might adversely affect BJP’s Lok Sabha performance. On the other hand, SP Jain, CEO and MD, Sun Capital Advisory, feels the move to go for simultaneous elections would once again reaffirm the Government’s willingness to push for long-term, path-breaking reforms. Hence, for investors with a long-term vision, this stand would hold good.

However, Prateek feels that going ahead, a political uncertainty could be detrimental, and for Sensex and Nifty, which are at their lifetime high, that could create havoc. Till date, the market is reacting positively to corporate earnings but this could change, warn market analysts.

The parliament’s monsoon sessionconcluded early last month and soon, the government and its allies and the opposition would be gearing up for the upcoming elections. Speculations are brewing over the next government and its policies - NDA or non-NDA, BJP with a fragile coalition or Congress with its aspirational and opportunistic allies. In such a scenario, an individual’s ability to decide on a substantial to small investment would be a major concern. It would lead to retail investors building up their portfolios accordingly. However, the flows into mutual funds systematic investment plans (SIP) are likely to continue, even if there could be meaningful corrections in large-cap indices, point market experts. As a result, mutual fund managers will continue to hold investable funds even during market corrections. While deployment of these funds will cushion the market declines leading to shallower corrections in the benchmark indices. “In these situations, investors should continue to consolidate their position in blue-chip stocks as these stocks are recession proof and will remain stable even during market volatility,” says Jain. Experts agree that it will not have any negative impact; rather it can provide relief to equity market investors.

If the general elections are advanced, a few experts feel that the markets will be relieved. “If the elections are clubbed together, then the anti-incumbency factor can be lowered in the general elections’ outcome too,” says VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services. But politically, this move might not garner support. “It will bring the already struggling economy to a standstill, as investments, individuals and corporate, will be put on hold, in the wake of uncertain policies after the elections,” says E M S Natchiappan, Congress Rajya Sabha Member of Parliament from Tamil Nadu. However, if the elections are held in 2019, the economy will comparatively be more stable as the outgoing government would have already presented its interims budget, which is essentially a vote-on-account. So, whatever substantive changes are to happen, it will happen in 2020. “In case of elections advancement, a full-fledged budget will be presented by the newly-minted government. That will be a source of uncertainty for any individual who has planned their budget and investments,” says Sen.

Since the Modi government took over in May 2014, Sensex and Nifty have consistently given an average return in excess of over 24 per cent per annum till December 2017. This consistent performance was purely based on liquidity flow provided by foreign portfolio investments (FPI) as well as money collected by local mutual funds through SIPs.

Though Sen acknowledges that the stock markets do not feed into the macro economy, he warns, “But, if elections are to be held early, almost certainly people will hold back their investments, especially, those who are still at the preparatory stage. Those who have started will have to continue since the cost of holding back is pretty high.” He points, at the moment, everyone is expecting early polls, which may result in more uncertainties for the stock market. Contradicting that, Dhruv Desai, Director and Chief Operating Officer, Tradebulls Securities, argues that for the last six-eight months, (stock) market people have been anticipating that elections dates will be advanced. So that concern is already factored into the current market scenario. “If the elections happen in November, there will be a big boost in consumer discretionary and consumer staple spending. The early polls will lower the current account deficit for the current fiscal as the government’s spending on wasteful grants will reduce,” says Desai. His views are corroborated by Vinod Sharma, Head, Private Client Group and Capital Market Strategy, HDFC Securities, who opines, “If the general elections are advanced to this year-end, a section of the market may face uncertainty and jitters, but it will ultimately augur well for the most.”

Even if the present government is willing to go for early elections, not all are willing to accept, as many of them feel, it will adversely impact the market. “Though investors believe that outcome of the elections will affect everything in the economy, that’s not the case,” says Sandeep Jain, MD and Portfolio Manager, IndiaNivesh Investment Managers. Today almost 40 per cent of the revenue of top 500 companies comes from overseas. Global events, trade war, currency war, oil shock can affect the market and not outcome of the elections, Jain argues. “The stock market is always volatile, no matter who is in the lead — through smart investing and long-term perspective you can manage the volatility. Always be focused on your investment goals, risk appetite and asset allocation,” says Jain.

Now, since the beginning of 2018, crude oil has begun to play a spoilsport. This has resulted in markets becoming volatile. In a parallel development, US Fed Reserve had announced it will increase its interest rates by 25 basis point, at least three times in 2018. In wake of the above situations, the claim by various insurance-stock market and mutual fund investment advisors, to give high return to their investors, based on last four-year performance, has to be questioned. Individual investments based on such claims are also questionable. “If someone has a SIP that person will continue with it. But probably, he will not increase the exposure right now. Similarly, corporates will continue with their investments which are half-way through but may hold back bigger investments,” says Andrew Holland, CEO, Avendus Capital Alternate Strategies. He adds that if the general elections are scheduled in November-December 2018, then the equity market will follow normal trends till September and October and may show changes in November.

However, in a politically volatile environment, all insurance mutual fund and stock advisors dish out lucrative offerings based on their excellent past performance. However, the returns statistics are based on past decades characterised by high interest rates, secured jobs in the manufacturing sector, relatively closed financial sector and high corruption. Hence, the investors should not get swayed by such arguments. Now the economy is much evolved (comparatively), interest rates have stabilised at a lower level, manufacturing sector jobs have declined, high redundancy is visible in service sector jobs, and as opposition parties allege, institutionalisation of corruption is on the rise. All these factors will play a critical role in the investment decisions. Then, why are the experts not educating investors at such an uncertain period?

Most of the SIP mobilisation is based on past performance which is not guaranteed. The past strong indicators, like high interest rates, job growth, strong public sector work force, are turning weaker. However, the mutual fund companies are assuring high rate of return to their SIP investors. “Early election can swing the market on either side and will be more volatile,” says B Gopkumar, Executive Director and CEO, Reliance Securities, who feels that only equity market will react on the news and no major impact is expected in the debt or gold markets.

“In the likelihood of an ‘unprecedented’ event, there is no need to change one’s asset allocation but the focus should be on large-caps. On the other hand, investors should continue investing through SIPs,” says Gopkumar. But the murmurs of early elections have begun to give minor jitters to the stock market. The unusual market volatility has already begun to affect the SIP mobilization. Investors have started or are planning to put their SIPs on hold, points Jain.

Early elections can only trigger buying opportunities in some of the quality mid-cap and small-cap companies, which have been through certain corrections after reaching their all-time highs of January 2018. “Investors can park their funds in well-performing sectors, like cement and pharma” says Bilgaiyan.

But the market volatility has taken its toll on FPI flow. The rising US interest rates have almost halted the India-US trade. FPIs are selling not only Indian equities but are also exiting Indian bond market. As a result, yield on Indian bond has risen. According to Jain, “The simultaneous election process saves huge time of all the stakeholders and cost of the exchequer. It is again positive for the markets and the economy too. As it happens with (economic) reforms, the short-term or one-time pain is likely to be experienced by businesses dependent on frequent elections.”

Political pundits opine, in the event of simultaneous elections, the timing of elections will play a crucial role. State assembly elections are a big event and it has its own importance this time, because it is happening just a few months ahead of the scheduled 2019 general elections. According to Kejriwal, “The markets will become tentative, volatile and super volatile in that order in the respective event sequences of announcement of election, post election and in case of unexpected  outcome.”

The current market level of Sensex is around 37,500 and Nifty is at around 11,500, and does not indicate any uncertainty. Market pundits feel that the pace of reforms may vary according to the political dispensation but in any case it cannot be reversed.

However, has the market factored in a possibility of a hung Lok Sabha?

“The markets, at the current scenario, have not factored in a hung Lok Sabha. In case, no party is able to form a stable government, the possibility of major correction to the tune of 25 per cent from the current level in the benchmark indices cannot be ruled out,”  says Kejriwal.

This generation of Indians will play an important role in bringing a major change in the country’s political and economic future, irrespective of time or when elections are held.

rajendran@outlookindia.com

With inputs from Yagnesh Kansara