This week will see the outcome of the battle of the ballot. Change or continuity? Will it make a difference to our investing strategies? How much will politics impact our investment decisions?
Let us divide the problem in to two parts. One is the investment environment (bullish or bearish mood, FII perception of the markets etc) and the other is the earnings outlook.
The investment environment will be immediately favourable if there is continuity. This gives a sense of comfort to big money that policies will not change. If we go in to the election manifestos of various parties, the battle seems to be more on freebies than on true economic development. The policy risks, to my mind seem to be minimal. Unless the next government totally changes either the GST structure or the pass through of subsidies by Direct Transfers. Let us be clear. Both of these reforms (irrespective of contradictory claims about the ownership on these two things) are big positives and in a sense limit the damage caused by freebies and there is some control on the flow. GST will at best be tinkered with, but structurally it is a solid concept.
The other element is one of cronyism. Irrespective of the party in power, business finds its friends. Every political party needs money and businesses tend to be ‘friendly’ with all parties. With lesser and lesser government controls, the impact of politics on business is considerably less. Yes, some business houses will gain and some will lose, but by and large, there may not be too much impact. Businesses where the government is the customer tends to be impacted. If there is a change of guard, some fall out of favour and some come back to favour. However, with the PSU bank clean up happening, a lot of businessmen have had to go for bankruptcy or shut shop.
Today, the banks are far cleaner than an election ago. Whether it will be more of the same in the future, no one can say.
On the whole, the platform is clean. Economic growth is a function of demand. Government spending money on infrastructure is rather limited as increased freebies leave little room for development expenditures.
The one question we all want to know is whether a change of guard would mean that fiscal responsibility with respect to the government finances will be relaxed. My guess is no. At best there would be ‘’shuffling” of lines, some tokenism and so on. More noise may happen outside the realm of economics.
Now, let me shift to corporate earnings. This is still ‘under repair’. Confidence to invest is still not visible and if there is continuity, new investments should happen.
A change of guard would mean a ‘wait and watch’, leading to delay. More important is the tightness in liquidity that is being spread by the non-bank sector facing a crisis of confidence. A ripple through effect on mutual funds and lenders, means that non bank credit has to slow down. And banks will be afraid to lend. So earnings growth would be subdued in any case.
Thus, with muted prospects for immediate earnings triggers, market moves will be more based on perception of the election outcome. Valuations are not cheap (unless we anchor ourselves to 52 week highs) either.
Hopefully, most invest-ors are holding cash now. I do not see the usual rush of pre-election result flows in, unless one treats the rally of Friday as something that will happen over the next week, before results are out. If there is continuity, markets would be in for a ‘relief’ rally. It is best to keep away from that rally and wait for the June quarter results before considering fresh investments.
If there is a change in the government composition — then the markets could see an immediate correction. It would be useful to keep a ‘buy’ list handy. And in the list, against each name, put a price that you are happy to buy. One thing I have been noticing in these past few corrections is that ‘high quality’ does not correct too much. Only the auto sector gave up some price thanks to slow down in the sales numbers. A sharp correction can be useful to add to the portfolio of high quality stocks. And if the broad indices show the fall, some investment in ETFs on the Sensex or the Nifty is worth considering.
Whatever be the outcome, it is useful to have a strategy. Do not get in to a reaction mode but in to a planned call based on outcomes. That way, you will avoid panic. Hopefully, those who invest in direct equities ‘know’ their sto-cks. The election results are unlikely to change earnings prospects.
(The writer is a veteran investment advisor. He can be reached at balakrishnanr@gmail.com)
