War - check. Inflation - check. Earnings - check. What’s next to worry about? Any guesses? The ELECTIONS!
In the next calendar year, there are over 40 national elections, including the US, which is consequential for global markets, and including India, which of course is a key event for India and for foreign investors raving over the India story.
Making money (or even safeguarding it) requires one critical element - foresight. But irrespective of the outcome of the election, here are a few things you can use to place yourself appropriately in the markets.
1. Risk or No Risk?
Whatever the ground reality be, foreign investors could be a little far from it, resulting in increased anxiety around the outcome of an event like a General Election. To cap exposure, foreign investors may choose to cap their India holdings, and even reduce it pre-elections. This can result in foreign capital outflow, putting pressure on the liquidity front.
For any investor, while the choice of assets remains varied, for a domestic investor, the choice of geography remains pretty restrictive. A foreign investor however, can simply choose to move money to places where the risk-reward becomes more favourable.
One of these can just be the US markets, which in the current scenario do offer very attractive yields relative to the valuations in emerging economies like India. The high valuations that India trades at, combined with the recency of increased weightage makes outflows a more real concern that prior periods.
To get shielded from this, one can just consider moving some money out of equities, and allocate it in debt or gold or even sit on liquidity. This can be looked as dry powder, to be used whenever the markets see falls making investing more attractive.
2. Sectors That Shine
The central investment theme around the current government has been policy initiative. Invest wherever the government is taking steps to ramp up the economy, and you have a better chance of making money.
However, we, at Rupeeting, like to dice this theme into two parts - one where the execution is long-term, like defence spending, private capex triggered by Make in India, transformation of public sector banks, and the overhaul of India’s power network.
And the other theme, where execution can be lumpy - like execution of infrastructure projects. Governments usually bulk up infrastructure spending towards the end of their term for enhanced perception, usually resulting in a decline in the first couple of years post election.
When policy is the central theme for any investment we would have made, we’d ideally stick around with the first sub-section of the theme, but start getting light on the lumpy execution bits so that we are safeguarded from possible declines in the near-term.
3. Post Election
In a sigh of relief state, the markets have a higher potential of performing better post elections, compared to the period of the run-up to elections. Of course, in India, a lot depends on the outcome of the election too, but we don’t want to get into that prediction zone.
Whatever the outcome of the election, India’s demographics still are advantageous, and a lot of the policy driven changes have long term tailwinds. For example, you can’t possibly hamper the momentum created by GST and UPI, or stall ongoing infrastructure development, or even roll back capex that was encouraged by the world’s move to a China+1 strategy.
We hence mentioned that the best strategy would be to create some dry powder now, and take advantage of any falls that come into the markets either in the run-up to elections, or at/immediately after elections.