The incumbent government is back into power ensuring continuity in decisive leadership, better policy predictability and reforms orientation. All these factors augur well for the economy and the capital markets at large.
To begin with, sentiment is likely to be bolstered in terms of attracting foreign institutional investments into India. Within the emerging markets pack, on a year-to-date basis, India has attracted the most inflows at Rs. 66,287.93 cr. This trend is likely to continue. On the domestic from too, inflows into mutual funds via the SIP route will remain robust. The Indian mutual fund industry has a monthly SIP book of Rs. 8,238 crore (Data as on April 2019).
It can be observed from past instances that whenever the election outcome is favourable, there tends to be a short term spurt in market returns. However, over the long term, the market seeks direction from macro-economic indicators which highlight the overall health of the economy.
In terms of equity investing, one of the key differences between year 2014 and 2019, is the market valuation. In 2014, the market was cheap and was going through a long phase of underperformance, which started around 2011. So, investing across market capitalization was a possibility given their attractive valuations. But that’s not the case now.
Today, the market is no longer cheap and, at the current price, most of the positives seem to be factored in. The Nifty price-to-earnings currently at 29.02x is quoting a 45% premium when compared to it long term average of nearly 20x.
Though there is value in PSU compared to the premium valuation of the bell weather indices, mid and small caps emerge as a better option. Equity accumulation by retail investors in mid- and small-caps, should be done in a staggered manner via SIP/STP.
The other area of prime importance in current market situation is adhering to asset allocation with adequate debt exposure. This can be achieved by opting for asset allocation schemes. Owing to the expensive valuations, for those investors looking to invest in the market, asset allocation schemes could be a preferable option.
An open ended fund of funds scheme investing in equity oriented schemes, debt oriented schemes and gold ETFs/ schemes.