Prospects of economy under the new govt

Historically, elections have been an event risk for the market, reflecting this VIX rose to 30% on 22nd May.

By Author  |  Rajiv Singh  |  Published: 24th May 2019  1:21 am
economy

After a long and exhausting election schedule, results are finally out, with the incumbent government coming back to power. However, the market had largely anticipated this event. Historically, elections have been an event risk for the market, reflecting this VIX rose to 30% on 22nd May. On account of strong gains ahead of the elections, we anticipate some profit taking, especially by market participants who made bets on the political outcome.

Historical Performance

Historically, we can conclude that in the six months following an election, markets have done well thrice and declined thrice. In 1996, the reason was simple – the market judged that the coalition that assumed power would be unstable. In 1998, the return after 6 months of the election was negative as signs of instability in the coalition as well as the Asian Financial Crisis took its toll. In 1999, the markets declined marginally due to a couple of factors; firstly investors were unsure about the stability of the coalition as well as the dot com burst.

A key point to note is the markets have done well whenever a stable coalition has assumed power after an election.

How can an investor benefit?

Interest rate sensitive sectors are likely to do well, not only from a policy perspective, but from an economic standpoint. The economy has been driven by personal consumption, but the drivers for growth are changing. Capacity utilisation remains low at 75.9 per cent, but has been rising. The rate of growth in fixed capital formation remains strong at 10.6 per cent for Q3FY2018-19 though this may slowdown for a couple of quarters due to the liquidity crunch as well as companies being in wait and watch mode ahead of the elections.

Capex spending should rise, leading to a pickup in the economy. Thus cyclical sectors like capital goods, real estate, and cement should gain. We also expect credit demand to remain high, and along with the NPA issues having peaked, banks should gain. The Rupee is likely to strengthen and bonds may rally, gains in the Rupee may lead IT and Pharma to underperform and FMCG sector may take a hit because of expensive valuations. G-Secs would be a good space to invest in.

Also the conditions for mid and small caps to outperform are broadly in place. The first is that markets should be in a risk on mode, and secondly that valuations should be favourable compared to large caps. The markets should enter risk on mode later this year, and valuations have become favourable.

Equities are a marathon, not a sprint; we believe that the longer term outlook remains bright. We also believe that the government is likely to further its reform agenda, which will provide the economy new drivers of growth and equity markets are likely to do well. However, in the near term, we do expect that markets will pause for a couple of quarters.

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