Until Election Results, Wait and Watch!

Last week, both the frontline equity indices reached new lifetime highs, a milestone that dominated headlines on business news channels and in financial newspapers. The market capitalisation of all the listed stocks crossed the mark of USD 5 trillion for the first time ever. Such dramatic headlines can easily lure investors into believing that the markets are poised to go even higher, prompting impulsive investment decisions. I can understand the temptation to chase a booming market and the fear of missing out when the stock market peaks. However, there are several reasons why investors should avoid making hasty ‘buy’ or ‘sell’ decisions based solely on these new highs.

When Nifty 50 and Sensex touched their lifetime highs, the overall market breadth was skewed towards decline. This indicates that while the Large-Cap indices were climbing, not all the segments of the market were performing similarly well. Large-cap stocks have underperformed the broader indices over the past year, and this recent surge appears to be a catch-up rally. Even within the large-cap category, only a few heavyweight companies have driven the rally.

Additionally, the upcoming general election result introduces significant uncertainty into the equity market. Many investors who have enjoyed profits over the past year are cashing out some of their gains, contributing to the current underwhelming performance of this segment. Therefore, it may be prudent to wait until this major uncertainty passes before making significant investment decisions. It’s often wiser to forego some potential gains rather than act with undue certainty in a volatile environment.

Regardless of the election outcome, the market is likely to experience volatility, which could provide attractive entry points for investors. Historically, the impact of election outcomes on the market has been short-lived. For example, in 2004, the market dropped 15 per cent in a single day following the election results. However, within six months, Nifty had rebounded by 21 per cent, and it was up 28 per cent over the next year. This historical context suggests that while elections can cause short-term volatility, the markets tend to stabilise and recover over time.

The current market uncertainty is also partly driven by continuous selling by foreign institutional investors (FIIs). They have been offloading domestic equities and now hold the lowest stake in BSE 500 companies in several years. Once the election results are announced and there is clarity on the new government, we might see FIIs returning to the Indian market – and maybe fuel the next rally.

Our cover story in this issue delves into the reasons behind the FIIs’ selling spree and when they are expected to return. The article also highlights which sectors are seeing the most withdrawals by FIIs. Given the robust growth potential of the Indian equity market, I believe FIIs are likely to return strongly. The earnings of Nifty 50 are projected to grow by 15-18 per cent over the next couple of years, which should help attract foreign investors back to the market.

In our special feature, we have explored Small-Cap companies and whether now is the right time to invest after a significant rally of over 50 per cent in the past year. The story examines historical trends following such strong performances. You will also find a curated list of small-cap stocks, categorised into three segments: turnaround, thriving and improving financials, each representing different sets of small-cap companies.

As we approach the outcome of the elections, my advice is to maintain a well-defined investment strategy and adhere to it. Avoid letting emotions like fear or greed influence your decisions, especially when the market is at a high. Stay disciplined and make choices based on your risk tolerance and long-term investment goals. Our next edition will be post the election results and we will have more data points to plan the further course of investment. Until then, watch from the sidelines!.

RAJESH V PADODE
Managing Director & Editor