Elections and it’s impact on your Portfolio

It’s my 4th General Election since I have joined the financial services industry and as always, uncertainty is dominating the market. As I had discussed earlier, uncertainty is not at all bad but is a key element of success, the same applies in case of politics too. It is this uncertainty, that keeps these politicians on their toes at least during the last year of their government.

If I look at the last 4 general elections the only constant thing is volatility during the last 6 months of pre-election but the first two years post elections have been very beneficial to the investors. On the other hand predicting elections and outcomes have been a loser’s game and at the end of the day, stock prices are the slaves of earnings. If there is earning growth the stocks later or sooner will follow the growth pattern. I am sure that the good and well-managed companies will continue to do well for their shareholders and bad ones are bound to disappoint their shareholders and this will continue to happen who so ever forms the government.

Earnings are dependent upon the GDP. With a young population and increasing productivity, GDP growth will remain high for some considerable amount of time, with low inflation levels 7-8 percent GDP growth looks quite possible for next 5-7 years. So, we can be rest assured that as far as our economy is concerned, it is going strong and is on strong footing.

What we have seen in the last 4 years is earning less growth in our stock markets, by earningless growth I mean earnings have been very disappointing, the spoiler being the PSU banks and telecom players. With NPA problems coming down for banks and telecom consolidation, overall earnings growth in next couple of years is looking strong now.

An election is a big event in any country and it brings lots of uncertainty with itself but if we are looking towards a broad and long term picture then this will only be a noise. Now, the time is to search for value and with discipline and patience we should commit to ourselves for a long term investment in the fastest growing democracy.

Nipun Madan, CFA