The general elections 2024 which started from 19 April 2024 to determine the new regime of the country has successfully completed its three phases. As the fourth phase voting begins on 13 May, the lower voter turnout compared to 2019 elections has spurred the volatility in the Indian stock market.
The three phases of general elections 2024 have recorded 64 per cent voter turnout compared to 67 per cent voter turnout in 2019 general elections. Experts believe that a relentless heat wave across the country has made the act of voting a daunting challenge for many citizens.
It is also believed that low voter turnout can impact the current regime’s much anticipated win. The uncertainty about the elections outcome has also resulted in the foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) selling trend to perpetuate.
Market admires certainty
“Markets generally prefer clarity rather than confusion, and that’s the basic nature of markets. Investors appear to be profit booking across sectors and across multi-caps ahead of the Lok Sabha election results, till such time complete clarity emerges as to the outcome,” said Amar Deo Singh, Sr. Vice President Research, Angel One.
Singh further added, investors are concerned with regard to the outcome, as to the margin of victory or any major upheaval in the offing, as markets being intelligent in nature, factoring all different scenarios.
The investors’ plight is also categorically reflected in India’s volatility index (VIX), also known as fear index, which has soared by 80 per cent week-on-week to 18.5 levels.
Over Valuation Invites Correction
The bullish run in the market which seemed to inflate certain sectors has cooled-off given the benchmark indices, Nifty and Sensex have merely delivered 1.51 per cent and 0.62 per cent returns respectively in 2024 so far compared to almost 20 per cent returns in 2023.
“The market’s reaction to various events is heavily influenced by the current valuations. An event that occurs during a period of low market valuations may be perceived positively, whereas the same event in a highly valued market might have a negative impact,” said Anirudh Garg, Partners and Fund Manager, Invasset.
Moreover, it's important to emphasise that capital preservation is just as crucial as capital appreciation. Trusting professionals to manage your investments, focusing on long-term goals, and not being swayed by short-term market corrections can help ensure a more stable and potentially profitable investment journey, added Garg.
Panacea In Current Situation
Despite our belief that these sectors might drive growth over the next two to three years, investors must be cautious. It's crucial to remember that a 30 per cent dip in your portfolio requires a nearly 50 per cent recovery to break even. Therefore, adopting a systematic investment plan (SIP) approach and buying during dips rather than chasing breakouts or momentum is recommended, said Garg.
Garg further recommended, Nifty below 20,000 would be a lump sum investment opportunity. It’s important to resist the fear of missing out (FOMO) and to avoid making short-term investments.
Notably, SIPs breached the Rs 20,000 crore mark to reach a total of Rs 20,371 crore during April. SIP book was at Rs 19,271 crore in March against Rs 19,187 crore in February 2024, according to Association of Mutual Fund (AMFI) data.
“Currently, almost all sectors seem to be in the overbought zone. So, tracking stock-specific action instead of gauging the bullish or bearish tendencies of an entire sector is recommended,” said VLA Ambala Research Analyst and Co-founder, Stock Market Today.
In this situation, selling futures with covered puts or carry strangle and straddle trading positions is suggested. However, make sure to cover it according to your portfolio type. For instance, consider hedging with Nifty Index Put options for portfolios heavy on large-cap stocks, added Ambala.
She further reiterated, portfolios heavy on small and mid-cap stocks cover it with mid-cap index put options for the July series. This could offset election-induced volatility. Maintaining a balanced portfolio with an allocation of 4-8% in these alternative assets could prove beneficial. Such a strategy would eliminate the need to exit the portfolio amid a temporary corrective move as they would be covered against them.
Volatility to Victory
Since the market loves certainty, the continuation of the current regime will not only mitigate the nervousness and fear among the investors but also depict a clearer picture of short to long-term economic outlook.
According to JM Financial, on a three-month basis into the election results, Nifty 50 index has concluded in green on four out five occasions, (1999, 2004, 2009, 2014, 2019) while exhibiting an average upward movement of around 10 per cent.
Nifty 50 had closed in red in 2004, down by 10 per cent, however appointment of Manmohan Singh as a prime minister fuelled confidence among investors which followed a rebound from June 2004 onwards.
Numerous reforms still need to be implemented, and it is crucial that those already underway are sustained to propel this nation towards the goal of becoming a USD 10 trillion economy. A continuation of the current government is likely seen as a stabilising factor that would foster the continuity needed for these long-term economic plans, said Garg.
Voter Turnout and More
It should also be noted the voter turnout is not the only phenomenon the volatility should be blamed for.
The concurrence of Q4 corporate earnings, absence of fresh cues, higher US treasury yield and geo-political instability have also contributed to the muted performance of the market.
Intense buying in gold, the current valuation, regulator’s rules of ultimate disclosure, and the Mutual Fund stress test continue to trigger the selling sentiments in the market, which is continuously causing profit booking sentiments in the market, said Ambala.
